Alkane Resources — Seamlessly shifting to Roswell

Since our last update note on 24 July, Alkane has announced:

Alkane’s Q4 quarterly activities report confirmed its earlier announcement of Tomingley production on 4 July and both contributed to its FY24 financial results announced on 26 August. These were broadly in line with our expectations, except the company sold 709oz (worth c A$2.3m) less than it produced during the final quarter of the year, which (all other things being equal) would have added an additional c 9.4% to earnings. This note updates our valuation of the company for all of the other announcements.

At the Australian Gold Conference in August 2024, Alkane provided detailed quarterly production and cost guidance to June 2026 for its San Antonio-Roswell-Tomingley operation, which detailed the path to increasing mill throughput and gold production by 36% over a two-year period. For the July-September 2024 period, in particular, it guided towards mill throughput of 260–290kt at a head grade of 2.1–2.3g/t to produce 16,500–19,000oz Au after process plant recoveries of 80–85% at an AISC of A$2,400–2,600/oz (average for the year). It met this guidance in all areas of operation in Q125, with the exception of its head grade, which exceeded the upper end of the guidance range by 6.1%, and AISC, which improved upon the lower end of the guidance range by 9.1% (albeit after a change in inventory credit of A$320/oz, without which AISC would have been almost exactly in the middle of the range). In the light of Alkane’s Q125 operating results, our forecasts for the remainder of the year and for the year itself are now as follows:

The main source of ore to the plant at Tomingley is now Roswell and, while only a small portion of the overall ore reserve has been mined, the initial grade reconciliations from the deposit are reported to be ‘performing well’, with a positive reconciliation of 14%. Notwithstanding Alkane’s solid operational performance during the quarter, probably the most significant change to our expectations comes from the confirmation that AISC guidance reflects a one-off cost for decline development that is accounted as sustaining capital and included in the AISC and that sustaining capex is running at a rate of approximately A$9m per quarter. While this has made relatively little difference to our overall estimate of AISC for FY25 (see Exhibit 1), it does result in a material reallocation of costs from the operating account to the capital account and, as a result, we have adjusted our financial forecasts for FY25 to those shown below in Exhibit 2.

Operationally, the fleet of new CAT 2900XE underground loaders has been reported to be successfully commissioned and operating remotely on the CAT Command System at Roswell, while the paste plant and the process plant flotation and fine grinding circuit remain on schedule to be commissioned in Q4 CY24, after which process recoveries are expected to lift by c 7%. At the same time, the surface internal access road and pipeline corridor from Caloma Two to Roswell has been completed and new pipelines are being laid.

To commence open cut mining at San Antonio, the Newell Highway will be relocated c 1km to the west of its existing corridor. This is a substantial body of work that has been through several design iterations over a number of years to receive full approval from Transport for NSW. The ore from the open cut operations will be added to the underground mine production at Roswell to provide sufficient ore to expand the processing plant capacity with a throughput upgrade to c 1.5Mtpa (from the existing c 1.1Mtpa). Expansion will be facilitated by the installation of an additional mill, thickener and electrowinning circuit. To this end, the Newell Highway road diversion construction contract has been awarded, with the next step for the contractor being to submit its environmental and construction management plans to the satisfaction of the regulator. Simultaneously, the next stage of engineering for the plant upgrade is commencing, with the majority of work on these two projects anticipated to last until the end of CY25, after which open cut mining at San Antonio will start in H1 CY26.

Alkane released its annual resources and reserves statement on 4 September. Resources and reserves for Roswell and San Antonio were the same as those in Alkane’s announcement of 27 February, while those of Boda-Kaiser were the same as those in its announcements of 29 April and 14 December and were addressed in our notes of January 2024 and May 2024. Nevertheless, a number of features of the statement were noteworthy regarding the company’s residual operations at Tomingley. In particular:

Reserve decreases were recorded at Wyoming One, Caloma One and Caloma Two. Wyoming One also registered a decrease in resources. However, resource increases were registered at Caloma One and, in particular, Caloma Two, where the extent of the increase was 38koz, or 32%. A summary of Alkane’s resources and reserves at Tomingley in the wake of the update is shown below:

At a milling rate of 1Mtpa (in the process of being increased to 1.5Mtpa), the reserve tonnage at Tomingley is sufficient to support operations for 0.7 years (or eight months). That is in line with expectations, given the operation’s shift to mining at Roswell and San Antonio. Of note, however, is the change in the potential life of operations implied by resources, which has risen by six months to six years and represents the continuation of a divergent trend between reserves and resources that started in FY22:

The increase augurs well for the potential continuation of mining at Alkane’s residual Tomingley operation both as a source of incremental ore to the plant (if appropriate) and for the extension of operations beyond FY31 once the San Antonio-Roswell mining plan is completed. Among other things, the changes in resource tonnages and ounces imply the delineation of some relatively high-grade resource material in the indicated category, in particular, at Caloma Two.

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 the Q125 quarterly activities report, our valuation of the dividend stream potentially available to Alkane shareholders from its immediate mining operations has increased by 13.4% to A$0.287/share (cf A$0.253/share previously). This increases to A$0.344/share (cf A$0.305/share previously) once the value of residual resources, which we now estimate at 956koz (cf 870koz previously) with a current value of US$23.0m (A$34.6m), or A$0.057/share, is included.

A graph of our updated expectations for Alkane’s EPS and (maximum potential) DPS stream and valuation from the present to end-FY31 is provided in Exhibit 5, below.

Note that, in this case, the DPS columns in Exhibit 5 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 Northern Molong Porphyry Project, we would expect the majority of any cash flows that could be used for dividends to instead be reinvested into the business, in the form of either exploration or capital expenditure.

In the meantime, it is worth noting that this valuation is calculated at a conservative long-term (real) gold price of US$1,794/oz. At the current gold price of US$2,659/oz, it increases by almost 200%, to 78.8 Australian cents per share.

A summary of our updated valuation of Alkane in the light of recent developments is as follows:

A number of features of the valuation are noteworthy:

Alkane had A$3.5m in net debt on its balance sheet at end FY24, comprising A$45.5m in cash and A$49m in external borrowings. According to its most recent quarterly activities report, it had A$40.2m in cash plus A$10.3m of gold bullion on hand and A$1.5m in listed investments as at end Q125. In addition, it reported that it had drawn A$45.0m of its A$60m project loan facility provided to it by Macquarie Bank for the Tomingley gold extension plan (TGEP) – an increase of A$2.2m relative to the prior quarter.

The first phase of major capex spending on the TGEP is, to all intents and purposes, now complete and the second phase, to divert the Newell Highway and increase the plant’s throughput, has now commenced and is expected to conclude late in CY25. Simultaneously, exploration expenditure, which had been running at c A$20m pa, has now also reduced as it reverts from detailed resource delineation to greenfields in nature and drilling reverts to the cheaper RC type (cf diamond). At the same time, however, free cash flow from operations will contribute meaningfully to capex to the tune of c A$48–88m pa in coming years as higher-grade production from Roswell and San Antonio is brought to account. During this period, Alkane’s revenue will also be protected via 81,700oz Au sold forward at an average price of A$2,842/oz (US$1,909/oz at prevailing forex rates) to June 2027 and put options to sell 132,180oz Au at a price of A$3,000/oz (US$2,016/oz) also out to June 2027. Together, these will 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).