3 September 2020 On 30 July, Alkane achieved its goal of demerging Australian Strategic

Materials (ASM) in order to become a purely gold-focused miner. Since

then, it has announced FY20 results, including an updated reserve &

resource statement and the results of additional drilling at Boda, which

continue to be consistent (in our opinion) with its hosting a multi-million-

ounce gold resource. This note updates our financial forecasts and

valuation in the aftermath of the ASM demerger in particular and also the

material (12.0%) strengthening of the Australian dollar vs the US dollar.

Year end Revenue

(A$m)

PBT*

(A$m)

EPS*

(c)

DPS

(c)

P/E

(x)

Yield

(%)

06/19 94.0 25.4 4.57 0.00 24.9 N/A

06/20 72.5 20.6 2.56 0.00 44.5 N/A

06/21e 105.7 23.5 2.96 0.00 38.5 N/A

06/22e 126.5 27.5 3.46 0.00 32.9 N/A

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

ASM (Dubbo) demerger dividend

The in specie distribution of ASM shares (incorporating the Dubbo rare earths

project) to Alkane shareholders was completed on 28 July, in the ratio of one ASM

share per five ALK shares. All other requirements having been met, ASM’s first day

of trading was Thursday 30 July. Taken together, the combined value of ‘new’

Alkane and ASM shares on 30 July implied the crystallisation of an immediate

29.5c ASM demerger dividend for Alkane shareholders (note: the gold price fell

US$14/oz that day) – a number that, if anything, has only increased subsequently

as ASM’s fundamental value has increasingly been reflected in its rising share

price.

Reserves expanded and extending

In its updated FY20 reserve and resources statement, Alkane revealed a 1.6Mt

increase in reserves at Tomingley (notwithstanding depletion), which is sufficient to

increase its life to three years from the end of FY20 (even at higher production

rates), with resources potentially able to support production for an additional 6.4

years thereafter. We estimate that Roswell and San Antonio could potentially add

another 15 years to the life of operations and should add circa another nine years.

NB Updated resource statements for Roswell and San Antonio (including resources

in the indicated category) are anticipated in October, as are updated mine plans.

Valuation: 55c confirmed plus up to 70c contingent

Even against the headwind provided by the Australian dollar, our updated valuation

of Alkane nevertheless confirms a value of 21c/share on its Tomingley asset plus

cash (cf 25c previously, but with A$20m having been demerged with ASM). To this

should then be added a further 29c for Alkane’s investments in Calidus and

Genesis and at least 5c for its maiden Roswell and San Antonio resources. To this

total of 55c can then be added up to a further 70c in value from contingent assets

(especially Boda), the final valuation for which will depend on additional, future

exploration success (see Exhibit 15).

Alkane Resources Demerger update

Reborn

Price A$1.14

Market cap A$679m

A$1.3890/US$

Net cash (A$m) at 30 June 2020* 41.7

*Pro-forma post-demerger

Shares in issue 595.2m

Free float 78%

Code ALK

Primary exchange ASX

Secondary exchange OTC QX

Share price performance

% 1m 3m 12m

Abs (17.2) 24.1 173.7

Rel (local) (19.1) 15.8 184.8

52-week high/low A$1.3 A$0.4

Business description

Alkane Resources is an Australian production and

development company. It previously produced

70,000oz of gold per year from the open-pit

operations at its Tomingley gold mine, but is now

transitioning to underground operations and

expects to produce around 47,500oz in FY21.

Next events

Q121 activities & cash-flow reports October 2020

Updated resources October 2020

Updated mine plans October 2020

Annual general meeting November 2020

Analyst

Charles Gibson +44 (0)20 3077 5724

mining@edisongroup.com

Edison profile page

Metals & mining

Alkane Resources is a

research client of Edison

Investment Research Limited

Alkane Resources | 3 September 2020 2

Recent developments

Since our last note on the company (007 strikes it rich, 23 April), Alkane has announced a number

of developments:

◼ The demerger of the Dubbo project into Australian Strategic Materials (effective July 2020).

◼ Quarterly and FY20 results.

◼ A reserves and resources update.

◼ Additional drilling results at its Boda prospect within the Northern Molong Porphyry Project.

In our last note, of the combined entity, we placed a value of up to 170c on Alkane’s shares,

comprising 25c/share for Tomingley plus cash and 52c for Dubbo. To this was added 14c for its

investments in Calidus, Genesis and Ziron Tech (see our note Genesis of a golden opportunity,

published on 24 September 2019) and at least 6c for its maiden Roswell and San Antonio

resources. To this total of 97c could then be added up to a further 73c in value from contingent

assets, the final valuation for which would depend on future exploration success (see Exhibit 15).

Among other things, this note updates our valuation of Alkane in the wake of the Dubbo/ASM

demerger.

ASM (Dubbo rare earths project) demerger

The in specie distribution and transfer of Australian Strategic Materials (ASX: ASM) shares to

‘Alkane Eligible Shareholders’ and the ‘Sale Agent’ was completed on 28 July, in line with the

timetable detailed in the Demerger Booklet released to the ASX on 17 June 2020. In keeping with

Alkane’s then 595.2m shares in issue at the time of the demerger, the total number of ASM shares

issued was 119.0m – consistent with the stated five for one demerger ratio. All other requirements

for listing having been met, ASM’s first day of trading was Thursday 30 July.

A brief summary of the trading levels of each company in the immediate aftermath of the demerger

is as follows:

Exhibit 1: ASM demerger dividend

Date ALK share price

(A$/share)

ASM share price

(A$/share)

Implied pre-demerger Alkane value

(A$/share)

Wednesday 29 July 1.190 N/A 1.190

Thursday 30 July 1.205 1.400 1.485

Thursday 3 September* 1.140 2.210 1.582

Source: Edison Investment Research, Bloomberg. Note: *The date of writing.

Note that ASM’s share hit a recent (closing) high of A$2.48/share on 24 August.

Tomingley

FY20 results and FY21 guidance

On 25 August, Alkane announced its results to 30 June. While this was prior to the demerger,

Alkane re-formatted its accounts to reflect AMS as a ‘group classified as held for distribution to

owners’, with the main body of the accounts thereby being left to reflect Alkane’s gold operations

and activities alone. Together with the pro-forma information provided in the Demerger Booklet,

published on 17 June, Edison has endeavoured as much as possible to present both the past

operating performance of Alkane, together with its future financial forecasts on the basis of its gold

operations only.

Alkane Resources | 3 September 2020 3

After having upgraded its guidance after a better than expected output in Q120, since Q220 Alkane

left its annual gold production forecast for FY20 unchanged at 30–35koz at an all-in sustaining cost

(AISC) of A$1,250–1,400/oz. In the event, it produced 33,507oz in FY20 at an AISC of A$1,357/oz,

notwithstanding the need to pause processing in December in order to accommodate an extended

maintenance shutdown before restarting in mid-February. Perhaps more significantly, the first

underground stope material was processed during the period, with both grade and metallurgical

recoveries performing as expected, while underground development progressed to schedule.

Alkane has now provided production guidance for FY21 of 45–50koz gold at an AISC of A$1,450–

1,600/oz, which we calculate is consistent with the following operating parameters over the course

of the year and forms the basis of our updated forecasts in Exhibits 3 and 16.

Exhibit 2: Tomingley quarterly operating results, Q120–Q421e

Q120 Q220 Q320 Q420 FY20 Q121e Q221e Q321e Q421e FY21e

Ore milled (t) 289,282 231,493 113,699 204,269 838,743 227,203 227,203 227,203 227,203 908,813

Head grade (g/t) 0.96 1.21 1.83 2.20 1.45 1.86 1.86 1.86 1.86 1.86

Contained gold (g/t) 8,929 9,006 6,690 14,448 39,072 13,587 13,587 13,587 13,587 54,348

Recovery (%) 87.4 88.3 85.6 89.3 88.1 87.4 87.4 87.4 87.4 87.4

Gold poured (oz) 7,497 6,929 5,723 13,358 33,507 11,875 11,875 11,875 11,875 47,500

Gold sold (oz) 6,997 9,143 3,864 12,992 32,995 11,875 11,875 11,875 11,875 47,500

Gold price (US$/oz) 1,474 1,483 1,581 1,713 1,563 1,906 1,919 1,749 1,749 1,831

Forex (A$/US$) 1.4593 1.4627 1.5282 1.5226 1.4932 1.4025 1.3890 1.3890 1.3890 1.3924

Average realised price (A$/oz) 2,151 2,084 2,126 2,327 2,199 2,674 2,665 2,429 2,429 2,549

C1 site cash costs (A$/oz) 1,000 1,024 995 981 997 1,268 1,268 1,268 1,268 1,268

AISC (A$/oz) 1,268 1,441 1,346 1,368 1,357 1,590 1,595 1,588 1,595 1,592

Source: Alkane Resources, Edison Investment Research. Note: Forecast average realised gold price in Q1–Q420 excludes forward sales over 17,770oz at an average price of A$1,836/oz.

Among other things, readers should note Edison’s short-term gold price forecast in Q121 and Q221

and our relatively conservative assumption that it will fall to US$1,749/oz (in real terms) in CY21

coupled with a US$/A$ rate that is lower/stronger (as far as the Australian dollar is concerned) than

at any time since March 2019 (NB this forex rate recorded a recent peak of A$1.7408/US$ on 19

March 2020).

A summary of Alkane’s implied H220 forecast results in the context of recent half-year periods is

provided in the table below. Readers should note the anomaly whereby Alkane’s H119, FY19 and

H120 results were reported with its ASM numbers fully consolidated, but its FY20 results were

reported with ASM reflected as ‘classified as held for distribution to owners’ and/or ‘di scontinued’.

The consequences of this are most obviously apparent in the line items entitled ‘loss after tax from

discontinued operations’. However, this anomaly is not considered material enough to significantly

detract from the overall trends apparent from the figures. Our updated forecasts for FY21, within the

context of our quarterly forecasts, disclosed in Exhibit 2, above, are also provided:

Alkane Resources | 3 September 2020 4

Exhibit 3: Alkane FY20 results vs H119, H220, FY20e and FY21e (A$m, unless otherwise indicated)

H119 H219 H120 H220 FY20e FY20 FY21e

Revenue 52.352 41.643 34.098 38.451 67.338 72.549 105.664

Cost of sales (28.829) (24.827) (16.500) (16.400) (33.054) (32.868) (62.861)

Gross profit 23.523 16.815 17.598 22.051 34.284 39.681 42.803

Other net income 1.759 (1.667) 0.111 (0.201) 1.688 (0.090) (0.090)

Administration expenses (4.797) (2.570) (4.993) (5.276) (11.386) (10.269) (7.367)

Exploration and evaluation expenditure expensed 0.000 0.000 0.000 (0.329) 0.000 (0.329) 0.000

Impairments 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Gain/(loss) on disposal 0.000 0.000 0.000 (0.317) 0.000 (0.317) 0.000

EBITDA/(LBITDA) 20.485 12.579 12.747 15.929 24.586 28.676 35.346

Depreciation (5.990) (1.265) (1.429) (7.722) (3.729) (9.151) (12.480)

EBIT/(LBIT) 14.495 11.314 11.318 8.207 20.857 19.525 22.866

Interest income/(cost) (0.258) (0.161) (0.109) 0.498 0.413 0.389 0.626

Loss after tax from discontinued operations 0.000 0.000 0.000 (0.583) 0.000 (0.583) 0.000

PBT/(LBT) 14.237 11.153 11.209 8.122 21.270 19.331 23.492

Income tax 2.047 0.219 3.743 2.826 6.260 6.569 5.873

Effective tax rate (%) 14.4 2.0 33.4 34.8 29.4 34.0 25.000

Profit/(loss) for the year 12.190 10.934 7.466 5.296 15.010 12.762 17.619

Basic adjusted EPS (A$/share) 0.0241 0.0216 0.0146 0.0091 0.0275 0.0233 0.0296

Source: Alkane Resources, Edison Investment Research

While it can be seen that earnings in FY20 were somewhat below our expectations therefore, it

should be noted that all of the negative variance could be attributed to a materia lly higher

depreciation charge in H220 (largely as a consequence of higher capital expenditure) and that, in

the absence of this item alone, results would otherwise have been better than our expectations,

driven by better revenues and good control of costs.

Tomingley FY20 resource and reserve statements

On 18 August, Alkane reported its updated resource and reserve statement for FY20 (by this time

excluding Dubbo resources). Among other things, the report was significant for showing a material

increase in reserves and resources in both absolute and percentage terms:

Exhibit 4: Tomingley updated FY20 total resource and reserve statement cf FY19

Category Tonnage

(kt)

Grade

(g/t)

Contained gold

(koz)

Category Tonnage

(kt)

Grade

(g/t)

Contained gold

(koz)

FY20 FY20

Measured 2,521 1.8 168 Proven 1,230 1.6 65

Indicated 4,600 2.2 310 Probable 1,737 1.9 109

Inferred 2,328 1.5 132 Possible* 0 N/A 0

Total 9,449 1.9 610 Total 2,967 1.8 176

FY19 FY19

Measured 1,317 1.8 76 Proven 722 0.8 19

Indicated 3,869 2.2 276 Probable 688 3.2 71

Inferred 1,253 1.5 61 Possible* 0 N/A 0

Total 6,439 2.0 407 Total 1,410 2.0 90

Change (units) Change (units)

Measured +1,204 -0.0 +92 Proven +508 +0.8 +46

Indicated +731 -0.0 +34 Probable +1,049 -1.3 +38

Inferred +1,075 -0.0 +71 Possible* +0.0 N/A +0

Total +3,010 -0.1 +203 Total +1,557 -0.2 +86

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

Within the context of having ‘reasonable prospects for eventual economic extraction’, open pittable

resources were restricted by an indicative optimised pit shell estimated at a gold price of

A$2,000/oz (cf A$2,665/oz at the time of writing – see Exhibit 2) with the potential open pittable

component assessed at a 0.5g/t gold cut-off. By contrast, the underground resource is restricted to

material below the current final pit design, below the highest stope level currently designed, with

Alkane Resources | 3 September 2020 5

potential for eventual economic extraction by underground mining methods assessed at a 1.3g/t

cut-off (cf 2.5g/t in FY19). The reported ore reserve is based on the measured and indicated

resources within the defined underground resource base at 1.3g/t, a gold price of A$2,000/oz and

the application of the current site-based mine design. While a portion of the reserve and resource

increase will inevitably have arisen as a result of lowering the underground cut-off grade (and the

increase in both reserves and resources is most apparent underground – see Alkane’s

announcement for full details), a cut-off grade of 1.3g/t at a gold price of A$2,000/oz nevertheless

appears appropriate within the context of Q4 C1 site cash costs of A$62.39/t milled plus an

additional A$24.61/t milled in additional AISC costs.

Full details of the changes in Tomingley’s reserves and resources are available in Alkane’s August

announcement. A comparison of the totals in Exhibit 4 nevertheless demonstrates a 3.0Mt increase

in resources and a 1.6Mt increase in reserves that, at a milling rate of 1.0Mtpa, are capable of

supporting a 1.6 year increase in the life of operations at Tomingley and potentially up to a 3.0 year

increase (excluding depletion and additional exploration at Tomingley’s extension areas such as

Roswell, San Antonio etc – see below).

Whereas Tomingley had sufficient reserves to support operations for 1.4 years from mid -2019

therefore, it now has sufficient reserves to last for 3.0 years from mid-2020 (notwithstanding a year

of mining and processing operations in the interim). Resources could then extend this by an

additional 6.5 years (resources being reported inclusive of reserves; cf 5.0 years in FY19) –

especially given that the average resource grade is higher than the average reserve grade and that

this is especially true in the higher, measured and indicated categories of resources.

As a consequence of these increases, Edison has formally increased its immediate assumed life at

Tomingley from the end of FY22 to the end of FY23.

Roswell and San Antonio resources

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.

Over the past two years, Alkane has conducted an extensive regional exploration programme with

the aim of defining additional resources that have the potential to be mined either via open pit or

underground methods and fed through the Tomingley gold plant. Note that, to this end, New South

Wales state government approval has already been sought given for an underground exploration

drive from Tomingley to the Roswell deposit, with equipment purchased, personnel recruited and

land acquired to facilitate the rapid development of the project. In general, the programme has

yielded broad, shallow, high-grade intercepts that demonstrate the potential for material project life

extension (subject to resource confirmation, landholder agreements and regulatory approvals).

On 28 January, Alkane reported a maiden inferred mineral resource at Roswell, which is

approximately 3km south of the Tomingley mine and processing facility. The San Antonio deposit is

a continuation of the Roswell mineralised zone to the south of the Rosewood fault and, on 20 April,

Alkane also announced a maiden resource at San Antonio.

Together, the Roswell and San Antonio resources comprise a 14,940kt resource at an average

grade of 1.87g/t, containing 898koz gold. While the tonnage of the maiden resource at the San

Antonio deposit lay between the upper and lower bands of Alkane’s exploration target, the maiden

resource declared at Roswell exceeded its upper bound by 13.2% in terms of tonnage and by

17.4% in terms of contained gold at a 3.7% higher grade (at a cut-off of 0.5g/t).

Alkane Resources | 3 September 2020 6

Exhibit 5: Roswell and San Antonio maiden resources* vs target

Target Actual Uplift of actual vs target

Prospect Bound 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 7,020 1.97 445 13.2 3.7 17.4

San Antonio Upper 10,200 2.80 918 7,920 1.78 453 -22.4 -36.4 -50.6

Lower 7,400 2.30 547 7,920 1.78 453 7.0 -22.6 -17.2

Total 14,940 1.87 898

Source: Alkane Resources, Edison Investment Research. Note: *All Roswell and San Antonio resources currently categorised as inferred.

Prior to its announcing the maiden Roswell and San Antonio resources, Alkane’s resources at

Tomingley (TGO) were 6,439kt of ore containing 407koz gold at a grade of 2.0g/t as at end-FY19,

which converted into 1,410kt of reserves containing 89koz gold at a grade of 2.0g/t. As such, the

maiden resources at Roswell and San Antonio more than trebled Alkane’s then gold resource at

Tomingley and, to all intents and purposes, met the lower limit of its exploration target at TGO

including El Paso (see Exhibit 6).

In terms of mine life, at a milling rate of 1Mtpa, Roswell and San Antonio’s resources could

therefore potentially add more than 14 years to the life of Tomingley’s operations. Pro-rata with

Tomingley’s existing reserves and resources ratio, Roswell and San Antonio’s resources could

convert into a reserve of 4.7Mt at 1.78g/t containing 255koz gold and therefore should be sufficient

to support an additional 4.7 years of production. However, a reserve estimate performed solely on

this basis may be unduly conservative. Whereas the Roswell and San Antonio resources are stated

‘pre-mining’, the Tomingley resource reflects a mature mine that has already mined out its open pit

reserves and has started to mine its underground ones. On a similar, pre -mining basis, the resource

at Tomingley was c 921koz, of which c 434koz have now been mined, with 610koz remaining in

reserves (see Exhibit 4) and c 179koz included in the underground mine plan (Edison assumption),

which suggests that a more appropriate conversion factor would be in the order of 60% (c 613/921),

in which case, Roswell and San Antonio’s reserves combined could prove to be in the order o f

9.0Mt, containing 539koz gold at a grade of 1.87g/t, and sufficient to support production for an

additional circa nine years (cf Alkane’s target of 10 years, with exploration still ongoing). Note that

the resources at Roswell and San Antonio will both have to be upgraded from the inferred category

into the indicated category, before they are eligible for conversion into reserves, which is the aim of

ongoing work at both deposits currently, where updated resource reports are expected to be

announced in October.

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 which basis we would

value the Roswell and San Antonio deposits (combined) at US$21.6m, or A$30.0m, or 5.0

Australian cents per share.

Exhibit 6 demonstrates the value that Alkane may immediately add to its operations via success at

all of its prospects to the south of Tomingley (ie Roswell, San Antonio and also including El Paso) in

the event that it hits its exploration targets:

Exhibit 6: Alkane exploration targets’ potential value (US$m, A$m, A$/share)

Tonnage

(kt)

Grade

(g/t)

Contained gold

(koz)

Valuation

(US$/oz)

Valuation

(US$m)

Valuation

(A$m)

Valuation

(A$/existing share)

Total* Upper 23,800 2.19 1,678 24.08 40.4 56.1 0.094

Lower 15,800 1.81 920 24.08 22.1 30.8 0.052

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

These valuations are based purely on the in-situ value of the resources that Alkane is targeting for

delineation. Self-evidently, these valuations are subject to increase to the extent that these

resources are subsequently upgraded to reserves and included in the Tomingley mine plan.

Alkane Resources | 3 September 2020 7

To this end, further drilling is underway at Roswell to reduce the drill hole spacing from a nominal

40m to 20m to convert inferred resources into the indicated and (perhaps) measured categories.

The resource delineated to date is a high-grade, large tonnage zone proximal to the Rosewood

fault in the southern section of the tenement. There is also potential to test the depth extensio ns of

the ore zone, while other exploration targets include the poorly constrained northern zone, where

mineralisation is open to the west and at depth where grade and tonnage potential is on an

improving trend. Some targets will also be tested from underground as the exploration drive from

Tomingley is developed. At the same time, further infill and extensional drilling is underway at San

Antonio with a view to defining both the continuity of the mineralisation to the south and west and

the high-grade zones at depth.

Boda drilling results

On 13 February, Alkane reported the assay results of drill hole KSDD005 at its Boda prospect and,

on 23 March and 22 April, the results of holes KSDD006, KSDD007 and KSDD008 and, on 19 May,

the results of hole KSDD009 (100m to the south of hole KSDD008). The drilling was part of a

5,974m diamond core exploration programme to test the depth and strike extensions to the

porphyry gold-copper mineralisation at Boda, which has now been completed.

Diamond core hole KSDD005 was located 200m vertically below KSDD003 and intersected an

extensive (>700m true thickness) pyrite shell with chalcopyrite dominant core (c 300m thick), which

is characteristic of the upper sections of an alkali porphyry mineralisation system. Litho -

geochemistry conducted on the drill samples also supported this interpretation, displaying a pattern

of outer propylitic and sodic alteration at the top of the hole evolving to a copper rich calc-potassic

core and terminating in a propylitic chlorite and pyrite zone. Holes KSDD006 and KSDD007 were

located 100m to the north and 100m to the south of the mineralisation defined by KSDD003 and

KSDD005, respectively. Hole KSDD008 was located a further 100m to the south of hole KSDD007

and hole KSDD009 a further 100m to the south of hole KSDD008.

A summary of all five holes is as follows:

Exhibit 7: Boda diamond drill hole assay results

From

(m)

To

(m)

Aggregate intercept

(m)

Average gold grade

(g/t)

Average Cu grade

(%)

KSDD005 262.0 1,415.0 720.7 0.45 0.19

KSDD006 105.0 948.0 638.6 0.25 0.13

KSDD007 59.0 1,319.1 1,197.1 0.54 0.25

KSDD008 7.3 973.0 965.7 0.22 0.11

KSDD009 12.0 876.0 315.4 0.21 0.13

Source: Alkane Resources, Edison Investment Research

In general, the holes recorded several significant gold-copper intercepts, within an extensive, low-

grade mineralised shell similar to Cadia East. Note that, for the purposes of Exhibit 7, multiple

intersections have been amalgamated and grades averaged according to the width of the individual

intersections.

In each case, the stratigraphic sequence and the style of alteration and mineralisation was also

reported to bear similarities to sections of the Cadia East deposit. The width of the mineralisation in

hole KSDD007 is interpreted as being the result of the channelling of fluids along margins from

Group 1 monzonites possibly from a deeper causative porphyry source. As well as the potential for

an inner potassic bornite rich core to the system, the deposit remains open both on strike and at

depth.

Alkane Resources | 3 September 2020 8

Northern Molong Porphyry Project background

The Northern Molong Porphyry Project is 100% owned by Alkane, covers c 115km2 of the northern

Molong Volcanic Belt (MVB) and is around 80km to the north-east of its Tomingley Gold Mine, in the

Central West of New South Wales (Exhibit 8).

Exhibit 8: Location of the Northern Molong Porphyry Project (NMPP)

Source: Alkane Resources

To date, Alkane’s drill results at Boda have demonstrated both a similar stratigraphic sequence as

well as style of alteration and mineralisation to Newcrest’s Cadia Province mines 110km to the

south, although it is also more structurally complex. Nevertheless, together, the Cadia Province

mines host a JORC-compliant mineral resource estimate of 36.8Moz Au at a grade of 0.36g/t Au

and 8.2Mt of copper at a grade of 0.25% Cu (see Exhibit 10) plus silver and molybdenum and

produced 843koz of gold last year at an AISC of US$160/oz Au (net of by-product credits).

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 – Kaiser, Boda, Comobella, Driell Creek and Finns Crossing – all within a 15km north-

west to south-east trending corridor (Exhibit 9) and all close to road, rail, gas and water

infrastructure. Importantly, the Boda anomaly correlates with a historical induced polarisation (IP)

survey completed by CRA Exploration (now Rio Tinto) over the Boda Intrusive Complex (BIC),

which showed a strong high chargeable anomaly along the northern edge of the survey area

coincident with the magnetic anomaly. As a result, Alkane has recently completed a 70 line

kilometre IP survey over the 6km strike extensions of the BIC to generate further drilling targets in

the area.

Alkane Resources | 3 September 2020 9

Exhibit 9: 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 (KIC) and the Boda

Intrusive Complex (BIC). Specifically, gold mineralisation has been discovered at Kaiser, Boda and

Glen Hollow (which is part of Comobella).

Analysis and interpretation of Boda drill results

In general, holes KSDD005–7 increased both the grade and width of the porphyry mineralisation

identified by hole KSDD003 (658.8m in aggregate at average grades of 0.41g/t Au and 0.18% Cu),

including the high-grade gold-copper chalcopyrite core. Hole KSDD008 increased the width of the

mineralisation, albeit at a slightly lower (but still consistent) grade.

From the drill hole results a number of observations can be made:

◼ From holes KSDD003, KSDD008 and KSDD009 the vertical depth before mineralisation is

encountered is minimal – that is, the deposit (almost) crops out on surface.

◼ From all holes, mineralisation extends to c 1km in depth.

◼ From all holes, the mineralisation is at least hundreds of metres in width.

In purely empirical terms, using the same methodology as in our last note, the inclusion of hole

KSDD009 in our analysis has caused us to reduce very slightly our assumed dimensions of the

orebody. Nevertheless, the changes involved are small relative to the potential errors in the

analysis, such that we are still happy to state that (given the information available) our best

estimate of the overall size of the Boda deposit is 575–738Mt at an average gold grade of 0.34–

0.35g/t containing 6.4–8.3Moz Au (plus copper) and containing a high-grade pod of in excess of

2.2Moz gold equivalent at a grade above its 3.0g/t cut-off.

Alkane Resources | 3 September 2020 10

Edison’s estimates, derived from data made public by a variety of sources, are provided in the table

below and are also compared with the resources disclosed by Newcrest for Cadia Ridgeway

(underground) and Cadia Province.

Exhibit 10: Edison estimate of the potential size of Boda mineralisation

Source of underlying data Edison Alkane Resources Newcrest

Characteristic (units) Updated

estimate

Prior

estimate

ALK

dimensions

High-grade

pod

Surface

projection

Cadia Valley

Ridgeway

Cadia Ridgeway

underground

actual**

Cadia Province

actual**

Strike (m) 640 712 500 150 250

Average estimated true width (m) 317 353 400 100 150

Estimated area of surface projection (Mm2) 0.238

Average estimated true depth (m) 945 977 1,100 500 945 600

Estimated volume (Mm3) 192 246 220 7.5 225 22.5

Estimated density (t/m3) 3.0 3.0 3.0 3.0 3.0 3.0

Estimated tonnage (Mt) 575 738 660 22.5 675 67.5 150 3,170

Estimated average gold grade (g/t) 0.34 0.35 *0.34 0.52 0.36

Estimated average copper grade (%) 0.17 0.17 *0.17 0.33 0.25

Estimated average gold equivalent grade (g/t) 0.52 0.51 0.52 3.0 0.2 2.0 0.84 0.63

Estimated contained gold (koz) 6,354 8,342 7,215 2,400 36,800

Estimated contained copper (kt) 985 1,285 1,122 480 8,200

Estimated contained gold equivalent (koz) ***9,707 ***12,140 ***11,032 2,170 4,340 4,340 ***4,033 ***64,699

Source: Edison Investment Research. Note: *Edison estimates; **From Newcrest reserve & resource statement, 31 December 2019; ***Conducted at prices of US$6,529/t Cu and US$1,919/oz Au.

Clearly such an estimate is very far from being anything close to JORC code -compliant and

experience would suggest that such estimates have an accuracy of approximately ±75%. However,

the increasing number of results in the region of 6.4–8.3Moz contained gold increases our

confidence that the ultimate resource estimate will be of this order of magnitude. If this does prove

to be the case, then it would suggest a multi-million ounce gold deposit at Boda with a potential

valuation (based on the US$24.08/oz average valuation of in-situ ounces calculated in our report

Gold stars and black holes, published in January 2019) of A$0.36–0.47/share at updated forex

rates and adjusted for the increased number of shares in issue at Alkane (cf 0.55/share previously).

In the meantime, a major reverse circulation (RC) and diamond core drilling programme has been

started in order to further test the high-grade core and larger resource potential at Boda, as well as

other regional targets defined by both the 3D-IP survey and existing Alkane data.

COVID-19

Since February, Alkane has been acting in response to information supplied by state and fede ral

authorities and complying with recommended measures to combat COVID -19. These include

heightened cleaning protocols, social distancing, stringent hygiene practices and health screening.

TGO is a predominantly a residential operation and only personnel and contractors essential to the

safe operation of the mine are permitted on site. All non-essential travel has ceased.

At present, operations continue as planned. However, COVID-19 has the potential to interrupt

operations in the event of any of the following:

◼ despite the extensive measures taken, sufficient employees test positive for COVID -19 and the

majority of any crew is unable to attend while they self-isolate;

◼ despite increasing inventory from suppliers and continuing to liaise closely with them, their

capacity to supply critical parts and reagents is compromised; and/or

◼ the New South Wales State government introduces regulations that inhibit suppliers or

employees from attending beyond a skeleton crew.

Alkane Resources | 3 September 2020 11

Tomingley valuation

As always, 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

plans (now shorn of any contribution from Dubbo/ASM) discounted back to present value at a rate

of 10% per year, excluding exploration expenditure.

Relative to our last note, we have now extended our life of operations at Tomingley by one year to

the end of FY23, in line with the life implied by its updated reserve and resource statement

(effective date 30 June 2020 – see Exhibit 4). In the aftermath of the demerger, our valuation of the

dividend stream potentially available to Alkane shareholders from its immediate Tomingley

operations is now A$0.186/share. However, to this must be added the va lue of residual resources at

the end of the life of operations, which we estimate to be 0.4Moz with a current value of US$10.3m

(A$14.3m), or A$0.024/share, to bring our total valuation of Tomingley to A$0.210/share (including

cash). This may be rationalised as our prior valuation of Tomingley (see below) plus cash of

A$0.25/share less A$20m (A$0.034/share) in cash demerged with Dubbo/ASM.

A graph of our expectations for Alkane’s EPS, DPS and valuation from the present to FY23 is as

follows:

Exhibit 11: Alkane life of operations’ forecast EPS and (maximum potential) DPS (A$/share)

Source: Edison Investment Research.

Note that the DPS columns in Exhibit 11 represent theoretical, maximum potential dividends

payable, rather than actual dividends forecast and are used solely for valuation purposes. In reality,

we would expect any dividend that could be payable (in FY21 for example) to instead be re -

invested into the business, either in the form of exploration expenditure or capital expenditure to

develop Alkane’s options at Tomingley further.

The above valuation compares with our pre-demerger valuation (including Dubbo/ASM) of

A$0.77/share (see our note 007 strikes it rich, published on 23 April), of which A$0.25 in value was

accounted for by Tomingley and cash and A$0.52 was accounted for by Dubbo. In that case, the

equivalent graph of our expectations for Alkane’s EPS, DPS and valuation from the present to FY43

was as follows:

-

0.05

0.10

0.15

0.20

0.00

0.02

0.04

0.06

0.08

0.10

2020 2021 2022 2023

A$/shareA

$/sh

are

Basic adj. EPS (LHS, A$/share) Dividends per share (LHS, A$) NPV of DPS (RHS, A$/share)

Alkane Resources | 3 September 2020 12

Exhibit 12: Previous* Alkane life of operations’ forecast EPS and (maximum potential) DPS

(A$/share)

Source: Edison Investment Research. Note: *See our report, 007 strikes it rich, published on 23 April 2020.

Sensitivities

Tomingley mine life

Our current valuation of Alkane is based on the present value of future dividends potential ly payable

to shareholders based on a three-year mine plan. However, Alkane reports that the approval

process with the New South Wales government to allow the development of the San Antonio and

Roswell deposits is ‘well underway’” Extensive consultation has taken place with local landholders

and key government agencies and is in the process of being expanded to the broader community

and stakeholders. At the same time, preliminary pit and underground designs have been prepared,

surveys and testing to prepare an Environmental Impact Statement are underway and affected land

either has been purchased or is under contract.

With the caveat that the exact cost parameters around extending the mine plan at Tomingley into

Roswell and San Antonio are, as yet, unknown, we calculate that, as we increase the life of the

operation, our valuation of the Tomingley portion of the business (based on discounted dividends)

increases as follows:

Exhibit 13: Tomingley and extensions’ valuation sensitivity to mine life increases (Australian cents per share)

Mine life extension

(years)

To end: Valuation Incremental valuation

change

Total valuation change

0 FY23 18.6 u/c u/c

1 FY24 20.7 +2.1 +2.1

2 FY25 24.5 +3.8 +5.9

3 FY26 27.9 +3.4 +9.3

4 FY27 31.1 +3.2 +12.5

5 FY28 33.9 +2.8 +15.3

6 FY29 36.5 +2.6 +17.9

7 FY30 38.9 +2.4 +20.3

8 FY31 41.0 +2.1 +22.4

9 FY31 42.9 +1.9 +24.3

Source: Edison Investment Research

Hence, increasing the life of Tomingley by nine years (ie the same as the amount implied by our

conversion of Roswell and San Antonio resources into reserves on page 6) adds 24.3c to our

valuation cf our 5.0c per share in-situ resource valuation, which approximates to less than two

additional years’ worth of mining (ie below the bottom end of what might reasonably be expected

given historical reserve to resource conversion ratios at Tomingley – see page 6). Note that

updated resource statements for Roswell and San Antonio (including the promotion of existing

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

2041

2042

2043

A$/shareA

$/sh

are

Basic adj. EPS (LHS, A$/share) Dividends per share (LHS, A$) NPV of DPS (RHS, A$/share)

Alkane Resources | 3 September 2020 13

resources from the inferred into the indicated category) are anticipated in October, as are updated

mine plans.

Gold price

As with all gold miners, Edison’s valuation of Tomingley is conducted in real terms at a flat nominal

gold price of US$1,892/oz, which declines (in real terms) to a price of US$1,494/oz in 2025.

Variations from this ‘base case’ scenario are considered in the table below:

Exhibit 14: Alkane Resources’ valuation sensitivity to the gold price (Australian cents per share, unless otherwise indicated)

Gold price change (%) -20% -10% u/c +10% +20%

ALK valuation 12.3 15.5 18.6 21.7 24.9

Valuation change -3.2 -3.1 0.0 +3.1 +3.2

Percent change from ‘base case’ -33.9 -16.7 0.0 +16.7 +33.9

Source: Edison Investment Research.

In the event that the gold price remains at US$1,919/oz in flat real terms (the price at the time of

writing), then our valuation of Alkane (based on the present value of potential dividends payable to

Alkane shareholders) increases by 21.0%, from 18.6 to 22.5 Australian cents.

Combined valuation of Alkane

A summary of our updated valuation of Alkane within the context of all of its assets is as follows:

Exhibit 15: Alkane Resources’ valuation summary (Australian cents per share)

Current Previous*

Asset Existing assets’

valuation

Contingent

assets’ valuation Potential total Existing assets’

valuation

Contingent

assets’ valuation Potential total

Tomingley plus cash 21 21 25 25

Dubbo - - 52 52

Sub-total 21 21 77 77

Investments in Calidus** and Genesis 29 29 14 14

Roswell and San Antonio maiden resources 5 15-24 24 6 10–19 19

El Paso and ongoing TGO exploration 4 4 5 5

Boda exploration 36-47 47 55 55

Total 55 55–75 125 97 70–79 170

Source: Edison Investment Research. Note: Totals may not add up owing to rounding; *Included Dubbo/ASM; **Excludes recent, additional A$3.2m investment by Alkane into Calidus in July 2020 at a share price of A$0.51/share (cf a share price of A$0.56 at the time of writing).

Alkane Resources | 3 September 2020 14

Exhibit 16: Financial summary

A$’000s 2018 2019 2020 2021e 2022e

Year end 30 June

IFRS IFRS IFRS IFRS IFRS

INCOME STATEMENT

Revenue 129,973.6 93,994.9 72,549.0 105,663.8 126,520.8

Cost of Sales

(51,080.9) (53,656.4) (32,868.0) (62,861.1) (76,532.7)

Gross Profit

78,892.7 40,338.5 39,681.0 42,802.8 49,988.1

EBITDA 70,378.7 32,971.7 29,412.0 35,436.0 42,621.4

Normalised operating profit 31,658.3 25,808.8 20,171.0 22,866.2 26,811.5

Amortisation of acquired intangibles

0.0 0.0 0.0 0.0 0.0

Exceptionals

0.0 0.0 0.0 0.0 0.0

Reported operating profit

31,658.3 25,808.8 20,171.0 22,866.2 26,811.5

Net Interest

(579.0) (418.8) 389.0 626.0 677.4

Joint ventures & associates (post tax)

0.0 0.0 0.0 0.0 0.0

Exceptionals

0.0 0.0 (646.0) 0.0 0.0

Profit before tax (norm) 31,079.3 25,390.0 20,560.0 23,492.1 27,489.0

Profit before tax (reported) 31,079.3 25,390.0 19,914.0 23,492.1 27,489.0

Reported tax

(6,919.9) (2,266.1) (6,569.0) (5,873.0) (6,872.2)

Profit after tax (norm)

24,159.4 23,123.9 13,991.0 17,619.1 20,616.7

Profit after tax (reported)

24,159.4 23,123.9 13,345.0 17,619.1 20,616.7

Minority interests

0.0 0.0 0.0 0.0 0.0

Discontinued operations

0.0 0.0 (583.0) 0.0 0.0

Net income (normalised)

24,159.4 23,123.9 13,991.0 17,619.1 20,616.7

Net income (reported)

24,159.4 23,123.9 12,762.0 17,619.1 20,616.7

Basic average number of shares outstanding (m)

506 506 547 595 595

EPS – basic normalised (A$) 0.05 0.05 0.03 0.03 0.03

EPS – diluted normalised (A$) 0.05 0.04 0.02 0.03 0.03

EPS – basic reported (A$) 0.05 0.05 0.02 0.03 0.03

Dividend (A$)

0.00 0.00 0.00 0.00 0.00

Revenue growth (%)

10.3 (-27.7) (-22.8) 45.6 19.7

Gross margin (%)

60.7 42.9 54.7 40.5 39.5

EBITDA margin (%)

54.1 35.1 40.5 33.5 33.7

Normalised operating margin (%)

24.4 27.5 27.8 21.6 21.2

BALANCE SHEET

Fixed assets 138,275.0 172,196.0 129,077.0 136,357.1 133,837.3

Intangible assets

93,136.0 103,894.0 32,745.0 42,745.0 52,745.0

Tangible assets

36,266.0 51,038.0 62,322.0 59,602.1 47,082.3

Investments & other

8,873.0 17,264.0 34,010.0 34,010.0 34,010.0

Current assets 93,306.0 76,501.0 59,096.0 65,176.6 89,436.9

Stocks

19,153.0 4,816.0 7,647.0 4,052.9 4,852.9

Debtors

2,030.0 1,998.0 2,940.0 8,684.7 10,399.0

Cash & cash equivalents

72,003.0 69,582.0 48,337.0 51,767.1 73,513.1

Other

120.0 105.0 172.0 672.0 672.0

Current liabilities (27,430.0) (21,762.0) (14,238.0) (9,979.7) (11,103.4)

Creditors

(9,299.0) (8,007.0) (9,425.0) (5,166.7) (6,290.4)

Tax and social security

(6,929.0) (9,317.0) 0.0 0.0 0.0

Short-term borrowings

0.0 0.0 (2,090.0) (2,090.0) (2,090.0)

Other

(11,202.0) (4,438.0) (2,723.0) (2,723.0) (2,723.0)

Long-term liabilities (13,647.0) (13,059.0) (19,522.0) (19,522.0) (19,522.0)

Long-term borrowings

0.0 0.0 (4,515.0) (4,515.0) (4,515.0)

Other long-term liabilities

(13,647.0) (13,059.0) (15,007.0) (15,007.0) (15,007.0)

Net assets 190,504.0 213,876.0 154,413.0 172,032.1 192,648.8

Minority interests

0.0 0.0 0.0 0.0 0.0

Shareholders' equity 190,504.0 213,876.0 154,413.0 172,032.1 192,648.8

CASH FLOW

Operating cash flow before WC and tax

69,941.3 33,135.8 28,173.0 35,346.0 42,531.4

Working capital

(9,498.0) (5,172.0) (3,481.0) (6,408.9) (1,390.6)

Exceptional & other

1,277.0 1,454.0 3,704.0 0.0 0.0

Tax

(6,919.9) 7,047.9 (249.0) (5,873.0) (6,872.2)

Net operating cash flow 54,800.5 36,465.7 28,147.0 23,064.1 34,268.6

Capex

(9,224.0) (19,621.0) (46,122.0) (9,760.0) (3,200.0)

Acquisitions/disposals

0.0 4.0 (20,068.0) 0.0 0.0

Net interest

(579.0) (418.8) 389.0 626.0 677.4

Equity financing

(5.0) 0.0 39,442.0 0.0 0.0

Exploration and Evaluation

(10,969.0) (11,578.0) (20,132.0) (10,000.0) (10,000.0)

Other

(4,317.0) (7,442.0) (9,522.0) (500.0) 0.0

Net cash flow

29,706.4 (2,590.1) (27,866.0) 3,430.1 21,746.0

Opening net debt/(cash) (41,969.0) (72,003.0) (69,582.0) (41,732.0) (45,162.1)

FX

311.6 169.1 0.0 0.0 0.0

Other non-cash movements

16.0 0.0 16.0 0.0 0.0

Closing net debt/(cash) (72,003.0) (69,582.0) (41,732.0) (45,162.1) (66,908.1)

Source: Company sources, Edison Investment Research. Note: FY18 and FY19 income and cash-flow statements are pro-forma, sourced from Alkane’s Demerger Booklet released to the ASX on 17 June 2020; balance sheet is ‘as reported’ until FY20 at which point ‘group classified as held for distribution to owners’ is removed from the reported figures.

Alkane Resources | 3 September 2020 15

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