alkane resources re initiation of coverage · alkane resources was known as alkane exploration...
TRANSCRIPT
12 February 2019 Alkane Resources is a well-funded gold production company with A$73.7m
in cash and no debt. It is seeking to leverage its cash balance and
extensive expertise in gold mining and exploration through a strategy of
investing in junior gold companies and projects that meet its investment
criteria. Alongside this, the company is transitioning from open pit mining
to underground mining at its Tomingley gold project and is pursuing the
finance required to develop its Dubbo polymetallic project.
Year end Revenue
(A$m) PBT*
(A$m) EPS*
($) DPS
($) P/E (x)
Yield (%)
06/17 117.8 6.6 0.02 0.00 10.0 N/A
06/18 130.0 31.5 0.05 0.00 4.0 N/A
06/19e 73.9 14.3 0.02 0.00 10.0 N/A
06/20e 47.9 1.7 (0.01) 0.00 N/A N/A
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Tomingley gold mine: Going underground
At Tomingley, operations are transitioning from open pit to underground. Over the
next four years we forecast the mine to produce an average of 32,000oz Au pa and
generate an average EDITDA of A$34m pa. The cash flow from Tomingley will fund
ongoing exploration to potentially extend the life of the mine, corporate overheads
and could contribute to the development of the Dubbo Project.
Investments in gold juniors: Expanding its portfolio
During Q418, Alkane acquired 144.6m shares at an average price of A$0.029/share
and 70m options exercisable at A$0.035 in Calidus Resources (ASX:CAI) through a
placing and on-market purchases. This represents c 10.19% of Calidus’s issued
capital. Calidus is an exploration company that has defined 1,248,000oz of gold at
a grade of 1.83g/t Au at its Warrawoona Gold Project in Western Australia. Alkane
recently attempted to invest in Explaurum (ASX:EXU), but this was terminated
following Ramelius Resources’ (ASX:RMS) successful takeover offer for the
company.
Dubbo polymetallic project: Seeking funding
Alkane completed an updated engineering and financials study for the Dubbo
Project in June 2018, which outlined its plans to develop the project in two stages.
Alkane is seeking A$808m funding for stage 1 production.
Valuation: Underpinned by cash and Tomingley
In our valuation, we take into account the market value of Alkane’s investment in
Calidus Resources and a discounted dividend analysis of the potential cash flow
generated from the next four years of operations at the Tomingley project, as well
as its cash position, to arrive at a valuation of A$0.27/share for Alkane. Assuming
Alkane secures the development funding for Dubbo in H119, and the prices of
zirconium, total rare earth oxide (TREO) and ferro-niobium improve to the level it
expects over the next three years, our valuation increases to A$0.44/share. This
provides an upside of 121% to the current share price.
Alkane Resources Re-initiation of coverage
Cashed up and hungry for investments
Price A$0.20
Market cap A$101m
Net cash (A$m) at 31 December 2018 73.7
Shares in issue 506.1m
Free float 78%
Code ALK
Primary exchange ASX
Secondary exchange OTCQX
Share price performance
% 1m 3m 12m
Abs 5.3 (13.0) (31.0)
Rel (local) 0.2 (14.7) (33.2)
52-week high/low A$0.3 A$0.2
Business description
Alkane Resources an Australian production and
development company. It previously produced
70,000oz of gold per year from its open pit
operations from its Tomingley gold mine but is now
transitioning to underground operations and is
expected to produce around 32,000oz of gold pa.
The company is also seeking funding to move its
Dubbo Polymetallic project into production.
Next events
H119 28 February 2019
Q319 update 27 April 2019
FY19 results 25 October 2019
Analyst
Dr Ryan D Long +44 (0)20 3077 5700
Edison profile page
Metals & mining
Alkane Resources is a
research client of Edison
Investment Research Limited
Alkane Resources | 12 February 2019 2
Investment summary
Alkane Resources is a gold production company with a strong balance sheet and a management
team with extensive experienced in successful exploration and mine development.
Underground operations extend the life of Tomingley: at the 100%-owned Tomingley gold
mine, Alkane expects to produce an average 33,000oz of gold pa over the next four years by
transitioning to underground mining, as the open pits have reached the end of their life. We
forecast that this will generate an average EBITDA of A$19m pa for the company between
FY19 and FY21, compared to an EBITDA of c A$69m in FY18.
Additional discoveries could continue to extend the life of Tomingley: Alkane is
attempting to extend the life of the plant at Tomingley by defining additional minable ounces
within a truckable distance of the plant.
Strong cash position being leveraged: Alkane is implementing its strategy to take advantage
of its significant cash position (A$73.7m at 31 December 2018) by investing in junior gold
mining companies and projects that have high exploration potential and/or require near-term
development funding. Alkane has completed its first investment into ASX-listed Calidus
Resources, accumulating 10% of the company at an average price of US$2.4/oz of resources
(A$3.4/oz). By acquiring interests in advanced gold projects, Alkane is diversifying and
potentially positioning itself to be able to continue gold production when Tomingley ends
production.
Securing funding for Dubbo would provide additional upside: the Dubbo polymetallic
project has all the material state and federal approvals, permits and licences in place, the
technical and financial studies are completed and the project will be construction-ready, once
the A$808m finance required for stage 1 production is secured.
Recent share price performance and upcoming catalysts
Over the past 12 months, Alkane’s share price has declined from A$0.32/share to A$0.20/share.
We believe this has been driven by the anticipated decline in gold production as Tomingley moves
from open pit to treating the mid-grade stockpile and then underground operations, combined with
weakening sentiment towards the sector against a backdrop of anticipated economic slowdown in
China. The potential catalysts for the company over the next 12 months are evidence of successful
completion of the transition to underground mining at Tomingley (H219), exploration success
extending the life of mine at Tomingley, additional investments in the gold junior space and securing
the development finance for Dubbo stage 1.
Sensitivities: Underground development and Dubbo financing
The development of an underground mining operation is fraught with risk: poor ground conditions,
water ingress, dilution and grade reconciliation can all affect the capital cost, operation cost,
production levels and development time frame for the mine.
The timing of funding required for the development of the Dubbo project is the major hurdle that
Alkane currently faces and the biggest threat to the company meeting our forecasts. We have
assumed the funding is secured early in FY20 as a scenario to demonstrate the potential value of
the company. In reality, market conditions will dictate the pace of the development funding
timetable, which is considered to be fairly fluid at present.
Alkane Resources | 12 February 2019 3
Financials: 50% decline in y-o-y revenue
In H1 FY19, gold production totalled 26,745oz at an all-in sustaining cost (AISC) of A$1,005/oz Au,
while gold sales totalled 30,497oz Au, generating revenue of A$52.4m at an average sales price of
A$1,717/oz Au. At the end of Q2 FY19, the company had a net cash position of A$73.7m.
In FY19, we forecast that Alkane will produce 40,000oz Au, down 49% y-o-y from 78,533oz Au in
FY18 due to reduced throughput as a result of transitioning to underground operations. We forecast
an AISC of c A$1,150/oz Au, up 15%y-o-y, compared with an AISC of A$1,002/oz Au in FY18. In
FY19 we forecast gold sales of 41,500oz, down 45% y-o-y from 75,507oz in FY18, generating
revenue of A$73.9m, down 43% y-o-y from A$130m in FY18 with EBITDA of A$21.2m, down 69%
from A$68.6m in FY18. Our forecast average sales price per ounce of gold is A$1,756/oz Au, up 3%
from A$1,706/oz Au in FY18.The reduction in gold production, revenue and EBITDA is driven by
transitioning from open pit to underground operations.
Company description: Gold & polymetallic in Australia
Alkane Resources was known as Alkane Exploration before 2007 and has been listed on the ASX
since 1969. At the time of the IPO, it was exploring for gas in the Sydney Basin, but moved into gold
exploration in the late 1970s. Alkane has been producing gold from the area around the town of
Dubbo since 1996.
Between 1996 and 2004, it extracted c 153,000oz of gold through a heap leach operation of
oxide ore from four open pits at the Peak Hill Gold Mine.
Between 2014 and 2018, it extracted c 305,000oz of gold from four open pits at the Tomingley
gold mine.
Between 2019 and 2022, it expects an additional 130,000oz Au to be produced. The ore will
come from the existing open pits (10,000oz Au), existing mid-grade stockpile (40,000oz Au)
and the underground development (80,000oz Au) of the Wyoming One orebody.
Alkane has also been actively exploring the area around the town of Dubbo for other metals and
minerals, and in 1998 commenced initial metallurgical evaluation of the Dubbo zirconium-rare earth
element-niobium-hafnium (polymetallic) project. Since then it has advanced the project to definitive
feasibility study (DFS) stage.
Alkane owns 100% of both the Tomingley and Dubbo projects, both of which are in New South
Wales (NSW), Australia (Exhibit 1).
Exhibit 1: Map of Alkane’s projects Exhibit 2: Map of Alkane’s Tomingley project
Source: Alkane Resources – TGP Exploration Update,19 October 2018
Alkane Resources | 12 February 2019 4
The company has commenced the underground development of Tomingley in early 2019, with the
first extraction of ore from underground to occur in mid-2019 and processing of the underground
ore in Q419.
Alongside the Tomingley underground development, Alkane is assessing the potential to go
underground at its former open pit mine, Peak Hill, while continuing its regional exploration
programme in the wider Tomingley area. It is also seeking the funding required to develop the
Dubbo project into a large polymetallic mine.
Tomingley gold project
The Tomingley gold project is composed of seven exploration licences covering an area of
c 440km2 (Exhibit 2). The project contains the four open pits that make up the current Tomingley
operation, which has an associated 1Mtpa processing facility. The project contains numerous
prospects that have already been demonstrated to contain gold, including the former Peak Hill Gold
Mine (153,000oz Au mined in 1996–2005) and the Myalls United Mine (70,000oz Au up to 1917).
Reserves and resources
The Tomingley project has a total JORC 2012-compliant mineral reserve estimate of 124,200oz Au
at a grade of 1.8g/t Au, the bulk of which would be accessible from an underground operation, with
a significant contribution from the mid-grade stockpile (Exhibit 3). The project has a JORC 2012-
compliant mineral resource estimate of 437,000oz Au at a grade of 1.8g/t Au, the majority of which
is considered open-pittable but has strip-ratio and physical limitations of the near-by highway that
limits the economically extraction (Exhibit 3).
Exhibit 3: Reserves and resources for Tomingley gold project
Deposit Reserve category Tonnes (t) Au grade (g/t) Contained Au (oz)
Tomingley open pittable (COG 0.5g/t)
Proved 211,000 1.7 11,000
Probable 6,000 1.7 200
Total 217,000 1.7 11,200
Tomingley stockpiles (COG 0.5g/t)
Proved 1,257,000 1.0 39,000
Probable 0 0.0 0
Total 1,257,000 1.0 39,000
Tomingley underground (COG 2.5g/t)
Proved 45,000 2.7 4,000
Probable 688,000 3.2 70,000
Total 733,000 3.2 74,000
Tomingley Total 2,207,000 1.8 124,200
Resource category Tonnes (t) Au grade (g/t) Contained Au (oz)
Tomingley open pittable (COG 0.5g/t)
Measured 1,462,000 1.6 73,000
Indicated 2,847,000 1.7 148,000
Inferred 1,020,000 1.3 41,000
Total 5,329,000 1.5 262,000
Tomingley underground (COG 2.5g/t)
Measured 92,000 3.6 10,000
Indicated 1,125,000 3.9 141,000
Inferred 237,000 3.2 24,000
Total 1,454,000 3.7 175,000
Tomingley Total 6,783,000 1.8 437,000
Source: Alkane Resources – Tomingley Resource and Reserve Statements FY18, 8 October 2018
Geology
The Tomingley gold project contains Ordovician volcanic, intrusive and sedimentary rocks that have
been complexly folded and faulted. Orogenic gold mineralisation at the Tomingley project is hosted
in porphyritic andesites and monzodiorites along the contact with volcaniclastic meta-sedimentary
rocks.
Alkane Resources | 12 February 2019 5
Alkane believes the Peak Hill deposit, which it formerly open-pit mined between 1996 and 2005 and
it is now examining for its underground potential, is a high sulphidation epithermal deposit that has
been highly deformed and hydrothermally altered. The host rocks are Ordovician volcaniclastic and
are similar to the sequence at Tomingley.
Current operations
Alkane has now completed open-pit operations at Tomingley. The company in focusing on treating
the mid-grade surface stockpile. Processing of the stockpile is then expected to continue until April
2019.
Underground development
At present the company expects to recover c 93,000oz Au from the underground development of
the Wyoming One orebody (Exhibit 4) at the Tomingley project over 40 months, which equates to
c 28,000oz Au pa. Mineralisation remains open under the existing three open pits, which could
extend the life of the underground operation beyond this initial period. With that in mind, Alkane is
planning to rapidly establish underground drill positions to target along strike and down dip
extensions. The company estimates the cash cost of the underground operation to be between
A$1,100/oz and A$1,200/oz.
Exhibit 4: model of the planned underground development at Tomingley
Exhibit 5: Block model at a 2g/t cut-off grade at Peak Hill, showing potential underground workings
Source: Alkane Resources – Tomingley Underground Development Approved, 24 September 2018
Source: Alkane Resources – Gold Resource Peak Hill, 18 October 2018
At the Peak Hill deposit, a JORC 2012-compliant inferred mineral resource estimate has been
established for 108,000oz Au at a grade of 3.29g/t Au and 0.15% copper (Cu) (Exhibit 5). The
deposit remains open at depth and has the potential for deeper mineralisation in the satellite
deposits. Alkane is continuing to re-evaluate the potential for an underground operation at Peak Hill.
Underground development timeline at Tomingley
Alkane has purchased and is refurbishing most of the major equipment that is required for the
underground operation at Tomingley. It has also completed the recruitment of experienced
underground operators.
The ground support for the portal started installation in late 2018, with underground development
now underway. The extraction of first ore is expected in mid-2019. This ore will be stockpiled at the
surface, with processing of the ore expected in Q419. Alkane estimates the total capex requirement
until first underground ore is recovered to be A$25m, which is likely to be funded from internal cash
resources.
Alkane Resources | 12 February 2019 6
Regional gold exploration around Tomingley
Alkane’s regional exploration efforts are focused on defining minable ounces to the south of
Tomingley (Roswell, San Antonio and El Paso prospects) and it is assessing the potential to go
underground at its former open pit operation at Peak Hill (Exhibit 6). Additional ounces in both areas
could be used to extend the life of operations at Tomingley.
Exhibit 6: Cross-section through the Peak Hill deposit Exhibit 7: Cross-section through the Roswell prospect
Source: Alkane Resources – Gold Resource Peak Hill, 18 October 2018
Source: Alkane Resources – TGP Regional Drilling Update, 1 February 2019
Mineralisation at the Roswell prospect has been defined over a north-south strike of 350m and
remains open to the north and south. Recent drilling at Roswell returned 39m at a grade of 4.49g/t
Au from 123m, 21m at a grade of 2.46g/t Au from 207m and 26m at 2.48g/t Au from 234m
(RWRC023), 16m at a grade of 1.90g/t Au from 76m (RWRC003) (Exhibit 7); 11.55m at a grade of
2.15g/t Au from 323.45m and 7.65m at a grade of 2.5g/t Au from 340.6m (RWD001). A follow up RC
drill programme towards the south of Roswell is underway.
Air core drilling at the San Antonio prospect returned results including 3m at a grade of 1.81g/t Au
from 57m (RWAC058) and 15m at a grade of 1.29g/t Au from 57m (RWAC101). This drilling was
focused on highly weathered rocks and several of the holes terminated in mineralisation or early in
quartz reefs. Follow-up reverse circulation drill programme is underway at San Antonio (5,000m)
and El Paso prospects (2,500m). These prospects cover a strike length of 2,500m.
At the Peak Hill deposit, a diamond drill programme is currently underway to provide confirmation of
the geology and structures that appear to control the higher-grade ore shoots in the deposit (Exhibit
6), as well as fresh material for metallurgical testing.
Investing in gold juniors
Alkane Resources is seeking to leverage its impressive cash position of A$73.7m (as at 31
December 2018) by acquiring interests in junior gold companies and gold projects, which it
considers have high exploration potential and/or require near-term development funding.
Alkane Resources | 12 February 2019 7
Alkane believes this strategy will allow it to continue generating revenue from gold production, even
after mining has ceased at Tomingley. Alkane’s first successful acquisition was 144.6m shares in
Calidus Resources through a placing and on-market purchases with an average acquisition price of
A$0.0295/share. Calidus’s current share price is A$0.028/share.
Alkane also attempted to acquire an interest in Explaurum but was unsuccessful following Ramelius
Resources’ increased bid for the company. Alkane was reimbursed its cash advance of A$0.8m and
received a break fee of A$0.4m.
Resources
Alkane holds 144.6m shares and 70m options exercisable at A$0.035 in Calidus Resources. This is
around 10.19% of Calidus on an undiluted basis. Alkane acquired its interest in Calidus at what we
believe is an attractive average price of US$2.4/oz Au resource (A$3.4/oz Au), which compares to
the average in-situ value of ASX-listed gold explorers of US$24/oz Au and a global average of
US$16/oz Au (source: Gold stars and black holes, January 2019).
Calidus is an exploration company that has defined an initial JORC 2012-compliant mineral
resource estimate of 1,248,000oz of gold at a grade of 1.83g/t Au at its Warrawoona Gold Project,
located in the East Pilbara of Western Australia.
The company has made numerous discoveries of gold mineralisation along strike of its current
mineral resource estimate and we believe it has the potential to prove up a significant project with
further exploration. Calidus is continuing to explore alongside undertaking an initial feasibility study
at the project.
Dubbo polymetallic project
The Dubbo zirconium-rare earth element-niobium-hafnium project is composed of one mining lease
(1724), which covers an area of 3,456ha (Exhibit 8), within a larger exploration licence, and is
focused on the Toongi deposit. The mining lease was awarded in December 2015 and is valid for
an additional 21 years, and can be renewed, which should cover the project’s initial 20-year mine
life. The project has all the material state and federal approvals, permits and licences in place and
is construction-ready, once the finance required to move the project into production is secured.
Exhibit 8: Location of the Dubbo Project
Source: Alkane Resources – Dubbo Project: Engineering & Financials Update, 4 June 2018
Alkane Resources | 12 February 2019 8
Two DFSs have been completed for the project (announced in 2011 and 2013). Since then, the
company has completed a number of optimisation studies and engineering reviews to improve
project metrics and potential returns, culminating in the Dubbo Project: Engineering & Financials
Update (announced on 4 June 2018). This study defined a pre-tax NPV8 of A$909m and a pre-tax
IRR of 16.1%.
Our valuation of the Dubbo Project is based on the results of this study, which defines a two-stage
development programme for the project. Stage 1 will be a 500ktpa operation due to start
construction once funding is secured, which in our model we assume is secured early in FY20, as a
scenario to demonstrate the potential value of the company. In reality, market conditions will dictate
the pace of the development funding timetable, which is considered to be fairly fluid at present.
Following stage 1, an expansion to 1Mtpa is planned for stage 2. The two-stage development
allows Alkane to build the project in a more investor-friendly way. The first stage will de-risk the
project and act as a proof of concept, potentially allowing the funding for stage 2 to be secured on
more favourable terms. Alkane is also examining the potential for a further expansion to 2Mtpa
should demand be high enough and funding available. Once the financing is completed,
construction of the project is estimated to take 27 months.
Reserves and resources
The Dubbo Project has a total a total JORC 2012-compliant mineral reserve estimate of 18.9Mt at a
grade of 1.85% ZrO2, 0.04% HfO2 and 0.7% TREO (Exhibit 3). It’s JORC 2012-compliant mineral
resource estimate is 75.18Mt at a grade of 1.89% ZrO2, 0.04% HfO2 and 0.74% TREO (Exhibit 9),
excluding yttrium, including yttrium grade is 0.88%.
Exhibit 9: Reserves and resources for Dubbo polymetallic project
Reserve category Tonnes (Mt) ZrO2 (%) HfO2 (%) Nb2O5 (%) Ta2O5 (%) Y2O3 (%) TREO (%)
Proved 18.90 1.85 0.04 0.44 0.03 0.14 0.74
Resource category
Measured 42.81 1.89 0.04 0.45 0.03 0.14 0.74
Inferred 32.37 1.90 0.04 0.44 0.03 0.14 0.74
Total 75.18 1.89 0.04 0.44 0.03 0.14 0.74
Source: Alkane Resources – Dubbo Project Resource and Reserve Statements FY17, 19 September 2017
Infrastructure
The Dubbo Project site will require a significant amount of ancillary infrastructure despite its
proximity to the town of Dubbo, largely because of the massive scale of the project. The project will
be able to use existing roads to transport goods to and from site, but the exiting road to the site
entrance will need to be upgraded to accommodate the project's traffic.
The water required for construction and development will come from the Macquarie River and the
Upper Macquarie River Alluvial Aquifer. Alkane has already obtained the required licences to extract
c 2gl annually.
Natural gas is required to heat reagents within the processing plant and Alkane is in discussions
with the owner of the gas distribution network in NSW to expand the existing network to the Dubbo
Project site. However, as a base case, the company has assumed the required gas is trucked to
site in its estimate of operating costs.
Grid-based high-voltage power will be installed at the site through a single-circuit 132kV overhead
transmission line and a dual-circuit 132kV overhead transmission line to the Geurie Switching
Station, around 25km away.
Alkane Resources | 12 February 2019 9
The Dubbo Project will use a residue storage facility made up of a series of cells that are double
lined to prevent leakage. Cells can be filled, closed and rehabilitated independently of each other,
providing a high standard of safety and rehabilitation.
The Dubbo Project will also require the construction of two facilities to produce two of the process
plant’s main reagent consumables: sulphuric acid and limestone. Sulphuric acid will be produced in
an on-site sulphur-burning plant with waste heat from the acid plant used to co-generate electricity.
Limestone will initially be purchased externally, while a quarry close to Geurie can be developed.
Geology
The Toongi deposit, on which the Dubbo Project is focused, is one of several alkaline volcanic and
intrusive bodies in the area that formed during the Jurassic period. Toongi is an elliptical-shaped
lava flow or sub-volcanic intrusion with a strike of 850m east-west and a width of 550m, extending
to a depth of around 115m below the surface (Exhibit 10).
Exhibit 10: Cross-section through the Toongi deposit
Source: Alkane Resources – Dubbo Project: Engineering & Financials Update, 4 June 2018
The orebody is dominantly fine-grained micro-porphyritic trachyte that is composed of 80% feldspar,
with potassium feldspar, albite and aegirine in roughly equal amounts. The minerals of economic
interest are fine grained (<100µm) and fairly evenly distributed throughout the host rock. The bulk of
the ore metals occur within Na-Ca-Zr-Hf-heavy rare earth elements (HREE) silicate phase minerals
(similar to eudialyte). The dominant Nb and Ta mineral is close to natroniobite in composition and
bastnasite hosts the light rare earth metals. The deposit also contains low levels of uranium and
thorium and is therefore a weakly radioactive ore.
Mining method
Ore will be extracted from a single open pit using conventional drill and blast operations in two c 10-
year stages. The initial open pit (stage 1) will have an area of c 20ha and be excavated down to a
depth of c 32m; the second stage will widen the pit to an area of 40ha.
Processing method
Alkane has been working on the processing flow sheet for the Dubbo project since 1998. The flow
sheet is based on sulphuric acid and water leaching, followed by solvent extraction recovery and
refining. A pilot plant has been periodically operational since 2008.
The extracted ore from the open pit first undergoes several stages of crushing and grinding before
being mixed with sulphuric acid and roasted to form sulphated solids (Exhibit 11). The sulphated
solids are then cooled, mixed with water and leached into a solution. The leach slurry is washed
Alkane Resources | 12 February 2019 10
and separated into two liquors. The first contains the majority of the light rare earth elements
(LREE), the second contains the zirconium, hafnium, niobium and HREE.
The liquor containing the HREE and other minerals passes through a solvent extraction circuit in
several stages. The zirconium-hafnium precipitate is extracted in the first stage; some of this
precipitate then passes to a hafnium-removal circuit producing zirconium and hafnium-rich
products. The liquor then passes to a crude niobium-tantalum precipitate that is further refined to
produce the final ferro-niobium product. The remaining liquor (mainly HREE concentrate) is
combined with the LREE concentrates and pumped to a REE separation process, which produces
final separated REEs as oxides.
Exhibit 11: Dubbo flow sheet
Source: Alkane Resources – Dubbo Project: Engineering & Financials Update 4 June 2018
Products
The polymetallic nature of the Toongi deposit combined with the complex processing method
means Alkane can produce a variety of products to supply a variety of end users, but the products
can broadly be split into four groups. Zirconium accounts for 47% of estimated life of mine (LOM)
revenue, REE 33%, ferro-niobium 13% and hafnium oxide 7% (Exhibit 12).
Exhibit 12: Percentage contribution of minerals and metals to LOM revenue at Dubbo
Source: Edison Investment Research
The Dubbo Project contains 14 of the 15 REEs, but neodymium, dysprosium and praseodymium
account for 84% of the LOM REE revenue (Exhibit 13).
Zirconium47%
REE33%
Ferro-niobium13%
Halfnium Oxide7%
Alkane Resources | 12 February 2019 11
Exhibit 13: Percentage of 'contribution to REE revenue (by REE) from the Dubbo Project
Source: Alkane Resources
The 14 products Alkane plans to produce are:
zirconium oxychloride (ZOC), which is used to make other zirconium chemicals;
zirconium basic carbonate, derived from ZOC, is used in the manufacture of zirconium salts,
as well as in coating, painting, papermaking, leather softeners, cosmetics, catalysts, ceramics
and as a lacquer dryer;
high-purity monoclinic zirconia powders are used in refractory materials and molten metal
fillers among other things;
low-hafnium zirconium oxide used to produce zirconium metal in the nuclear industry and
attracts a significant price premium over other grades containing hafnium;
yttria-stabilised zirconia powders and products are used for a range of applications and
markets, including zirconia-milling media to reduce and control particle sizes;
hafnium oxychloride is used as a source of hafnium to produce other hafnium chemicals or
complexes, or converted to high-purity hafnium oxide;
high-purity hafnium oxide has an increasing range of applications due to its specific
ferroelectric and thermoelectric properties;
ferro-niobium, Alkane will produce crushed ingots with a composition of 65% Nb via a joint
venture with Treibacher Industrie; the main market for ferro-niobium is the steel industry;
praseodymium/neodymium oxide are used in rare earth permanent magnets;
dysprosium oxide is used in conjunction with other elements in making laser materials,
commercial lighting and in neutron-absorbing control rods in nuclear reactors;
terbium oxide is used as a dopant for materials that are used in solid-state devices, and as a
crystal stabilizer of fuel cells which operate at elevated temperatures;
yttrium oxide is a common material used for materials science and inorganic compounds;
unseparated lanthanum and cerium concentrates used in glass, and as a catalyst for oil
cracking and rubbers; and
heavy and light rare earth concentrates that contain samarium, europium, gadolinium and
lutetium.
Additional information on the most economically significant minerals to be produced at Dubbo can
be found in the Edison Explains section of our website:
zirconium/hafnium
REE
ferroniobium
Nd2O3 - 45.82%
Dy2O3 - 23.06%
Pr6O11 - 15.50%
Tb4O7 - 5.25%
Y2O3 - 5.11%
Nd2O3 - 45.82%
Dy2O3 - 23.06%
Pr6O11 - 15.50%
Tb4O7 - 5.25%
Y2O3 - 5.11%
CeO2 - 1.32%
La2O3 - 0.80%
Gd2O3 - 0.78%
Lu2O3 - 0.70%
Er2O3 - 0.66%
Yb2O3 - 0.54%
Ho2O3 - 0.32%
Sm2O3 - 0.10%
Eu2O3 - 0.04%
Alkane Resources | 12 February 2019 12
Funding
The capex for stage 1 at Dubbo is estimated to be A$808m and A$692m in stage 2, giving a total
expenditure of A$1.5bn. This is a large amount for a company with a market cap of A$99m to
secure. Alkane plans to raise the funds required through:
securing offtake contracts: Alkane has an agreement with Minchem for zirconium products, a
JV with Treibacher Industrie for ferro-niobium, a memorandum of understanding with Siemens
for a number of REE products and range of other letters of intent for zirconium products; it is
continuing its discussions with other potential offtake counterparties;
the sale of an interest in the project: Alkane continues to meet with potential strategic
partners;
export credit agencies (ECAs): the company continues to liaise with ECAs from potential
offtake partner countries, as well as engineering, equipment supply and construction partners;
traditional debt and equity: the company appointed Sumitomo Mitsui Banking Corporation to
assist with arranging the debt financing for the project; and
non-traditional funding: the company recognises that it may be necessary to look at prepaid
offtake contracts, royalties, product streaming and equipment leasing.
Dubbo peer group comparison
Relative scale compared to REE peers
Compared to the deposits held by Alkane’s REE peer group, Dubbo is relatively small and low-
grade based on its total rare earth oxide (TREO) content (Exhibit 14). This is because the REE
content of the deposit only accounts for 33% of its estimated LOM revenue, with zirconium
accounting for 47%, ferro-niobium 13% and hafnium oxide 7% (Exhibit 12). If we compare Dubbo to
its REE peer group using the TREO equivalent grade, we can see that Dubbo is not only one of the
three highest-grade deposits but also the largest in terms of contained TREO equivalent of the
three highest-grade deposits (Exhibit 14).
Exhibit 14: Resource estimate tonnage and grade of REE projects
Source: Edison Investment Research using various technical reports
Management expects the Dubbo Project to have an LOM of 20 years based on the reserve
estimate (Exhibit 15). Based on the size of the resource estimate, management believes the project
could have an LOM of 75 years, which makes it the largest of its peer group.
Ngualla - Peak Resources
Nolans - Arafura Resources
Kvanefjeld - Greenland Minerals
Yangibana - Hastings Technology Metals
Brockman - Hastings Technology Metals
Songwe Hill - Mkango Resources
Round Top - Texas Mineral Resources Corp
Bear Lodge - Rare Element Resources
Browns Range - Northern MineralsBokan - Ucore Rare Metals
Nechalacho - Avalon Rare Metals
Ashram - Commerce Resources
Dubbo (TREO) - Alkane Resources
Dubbo (TREO Equivalent) - Alkane Resources
0
1
2
3
4
0 200 400 600 800 1,000 1,200
Gra
de (%
)
Tonnes (t)
Alkane Resources | 12 February 2019 13
Exhibit 15: LOM of Dubbo and REE peers based on resources
Source: Edison Investment Research using various technical reports
Strip ratio compared to REE peers
The Dubbo Project benefits from an exceptionally low strip ratio of 1:0.1 for stage 1 and 1:0.2 for
stage 1 and 2 combined compared to its peer group (Exhibit 16), which is a key reason why the
project’s opex is in the mid-range of its peer group (Exhibit 19). This is a result of the geometry of
the mineralisation combined with a lack of over burden over much of the deposit (Exhibit 10).
Exhibit 16: Strip ratio of Dubbo and REE peers
Source: Edison Investment Research using various technical reports
REE recovery compared to REE peers
Compared to Alkane’s REE-focused peer group, the Dubbo Project appears to have a relatively low
REE recovery rate (Exhibit 17) of 60%. There are two reasons for this, the first is that Alkane plan to
produce finished products from Dubbo, while the majority of its peer group are likely to produce
intermediate products so the recoveries of the peer group appear higher than Alkane’s. Secondly,
because REEs only account for 33% of the LOM revenue of the Dubbo Project, so the recovery
circuit is optimised for a higher recovery of zirconia (84.4%), which accounts for 47% of the
project’s LOM revenue.
Exhibit 17: REE recovery rate of Dubbo and REE peers
Source: Edison Investment Research using various technical reports
01020304050607080
Dub
bo T
otal
Res
ourc
es-
Alk
ane
Res
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es
Bea
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- R
are
Ele
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Ash
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- C
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Res
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Nol
ans
- A
rafu
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esou
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Dub
bo S
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2 -
Alk
ane
Res
ourc
es
Rou
nd T
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…
Nec
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are
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Nor
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iner
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Has
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Met
als
Dub
bo S
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Alk
ane
Res
ourc
es
Min
e lif
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ears
)
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0
Yangibana - Hastings Technology Metals
Browns Range - Northern Minerals
Bear Lodge - Rare Element Resources
Nolans - Arafura Resources
Songwe Hill - Mkango Resources
Ngualla - Peak Resources
Kvanefjeld - Greenland Minerals
Ashram - Commerce Resources
Dubbo Stage 1 & 2 - Alkane Resources
Dubbo Stage 1 - Alkane Resources
Strip ratio
0 20 40 60 80 100
Songwe Hill - Mkango Resources
Kvanefjeld - Greenland Minerals
Ngualla - Peak Resources
Browns Range - Northern Minerals
Bear Lodge - Rare Element Resources
Round Top - Texas Mineral Resources Corp
Yangibana - Hastings Technology Metals
Nolans - Arafura Resources
Ashram - Commerce Resources
Dubbo - Alkane Resources
Recov ery (%)
Alkane Resources | 12 February 2019 14
TREO equivalent annual production compared to REE peers
During stage 1, management expects Dubbo to produce an average of 2,603t of TREO pa. This
increases to 5,269t of TREO pa with the addition of stage 2. As TREO only accounts for 33% of the
LOM revenue, we compared Dubbo to its REE peer group using TREO-equivalent production
based on the prices assumed in our model, which averages 8,301tpa for stage 1 and 15,575tpa for
stage 1 and 2 combined (Exhibit 18). On this basis, stage 1 is a moderate-scale operation whereas
stage 2 is much larger. It is important to note that Alkane plans to produce finished products from
Dubbo, while the majority of its peer group are likely to produce intermediate products that will
receive a discount to the market price.
Exhibit 18: TREO production of Dubbo and REE peers
Source: Edison Investment Research using various technical reports. Dubbo shown as TREO equivalent.
Position on cost curve compared to REE peers
Using the Dubbo Project’s opex per TREO equivalent estimate (see above) compared to the opex
per TREO of its REE peer group, the Dubbo Project lies within the middle of the cost curve for
stage 1 and stage 1 and 2 combined (Exhibit 19).
Exhibit 19: Cost curve of Dubbo and REE peers
Source: Edison Investment Research using various technical reports. Dubbo shown as TREO equivalent.
Position on capital intensity curve compared to REE peers
The Dubbo Project lies within the middle of the capital intensity curve on a capex per TREO-
equivalent basis for stage 1 and stage 1 and 2 combined (Exhibit 20).
Exhibit 20: Capital intensity curve of Dubbo and REE peers
Source: Edison Investment Research. Dubbo shown as TREO equivalent. Capex figures exclude contingency.
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Kvanefjeld - Greenland Minerals
Ashram - Commerce Resources
Dubbo Stage 1 & 2 - Alkane ResourcesNolans - Arafura Resources
Ngualla - Peak Resources
Dubbo Stage 1 - Alkane Resources
Yangibana - Hastings Technology Metals
Nechalacho - Avalon Rare MetalsBear Lodge - Rare Element Resources
Round Top - Texas Mineral Resources Corp
Browns Range - Northern Minerals
Songwe Hill - Mkango Resources
TREO production (tpa)
0
10
20
30
40
Nec
hala
cho
- Ava
lon
Rar
e M
etal
s
Rou
nd T
op -
Tex
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Cor
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Son
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Dub
bo S
tage
1 -
Alk
ane
Res
ourc
es
Bea
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Rar
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ent R
esou
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Nol
ans
- Ara
fura
Res
ourc
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Dub
bo S
tage
1 &
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Alk
ane
Res
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Yan
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Has
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Tech
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Kva
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Ash
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- C
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Res
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Ope
x (U
S$/
kg T
RE
O p
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0
50,000
100,000
150,000
200,000
Nec
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- Ava
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Bro
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Cor
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Dub
bo S
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1 -
Alk
ane
Res
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bo S
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Alk
ane
Res
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- Ara
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Res
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Alkane Resources | 12 February 2019 15
Valuation and funding assumptions
Mineral price assumptions
To value and forecast the production from the Tomingley gold mine, we used Edison’s gold price
deck of US$1,263/oz Au for 2019, US$1,482/oz for 2020, US$1,437/oz for 2021 and US$1,304/oz
for 2022. We use an exchange rate of US$1.39/A$.
Given the relative complexity and low transparency of the REE market and products used to value
the Dubbo Project, we chose to use the average price forecasts defined in its engineering and
financials update (announced 4 June 2018). We focused our model using the top eight products the
company plans to produce, which account for 94.5% of the LOM revenue. The other six products
we include as a factor of the major products. In addition to our base-case model we provide a
detailed sensitivity analysis (Exhibit 25 and Exhibit 26), which includes price assumptions.
In the model we used flat commodity prices over the mine’s 20-year life with production starting in
2022. The prices used are US$10,000t for zirconium oxychloride (December 2018 price
US$2,450/t); US$90,000/t for neodymium oxide (October 2018 price US$46,960/t); US$21,000 for
low hafnium zirconia (October 2018 price US$4,700/t); US$33,350 for ferro-niobium (December
2018 price US$45,000/t); US$21,000t for yttria stabilised zirconia (October 2018 price
US$10,000/t); US$325,000/t for dysprosium oxide (October 2018 price US$173,000/t);
US$600,000/t for hafnium oxide (December 2018 price US$850,000/t); and US$90,000/t for
praseodymium oxide (October 2018 price US$59,000/t).
The majority of the prices used in our forecast are above the current level and reflect the company’s
belief in the underlying supply-demand commodity fundamentals. Although we believe the REE
fundamentals are supported by developments in the electric vehicle space, the current economic
slowdown in China against the backdrop of the US trade tensions may prevent REE prices from
appreciating in the near term.
Updated project study assumptions
We base our forecasts and valuation of Alkane’s Tomingley project on the Tomingley Underground
Development Approved update (announced on 24 September 2018) and on guidance from
management. The key operational variables used in our discounted dividend model between 2019
and 2022 are outlined in Exhibit 21.
Exhibit 21: Variables used in Tomingley valuation
2019e 2020e 2021e 2022e
Gold produced (oz) 40,000 22,940 34,479 35,686
Gold sold (oz) 41,500 22,940 34,479 35,686
Revenue (US$m) 52 34 50 47
Opex (US$m) (31) (19) (26) (22)
Sustaining capex (US$m) (15) (8) (7) (2)
Source: Edison Investment Research
We base our forecasts and valuation of Alkane’s Dubbo Project on the project’s engineering and
financials update (announced 4 June 2018). The key operational variables used in our discounted
dividend model between 2020 and 2030 are outlined in Exhibit 22.
Alkane Resources | 12 February 2019 16
Exhibit 22: Key operational and price assumptions used in Dubbo valuation
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Zirconium oxychloride produced (t) - - 4,646 5,421 4,259 2,102 2,102 8,179 10,205 10,259 10,542
Neodymium oxide produced (t) - - 301 370 416 460 460 806 919 920 925
Low hafnium zirconia produced (t) - - 500 1,000 1,500 3,000 3,000 3,000 3,000 3,000 3,000
Ferro-niobium produced (t) - - 644 791 887 983 982 1,717 1,974 1,976 1,983
Yttria stabilised zirconia produced (t) - - - - 1,577 3,153 3,153 3,153 3,153 3,153 3,153
Dysprosium oxide produced (t) - - 40 49 55 61 61 106 121 121 122
Hafnium oxide produced (t) - - 33 40 45 50 50 50 50 50 50
Praseodymium oxide produced (t) - - 77 95 107 118 118 207 236 236 238
Zirconium oxychloride revenue (US$m) - - 46 54 43 21 21 82 102 103 105
Neodymium oxide revenue (US$m) - - 27 33 37 41 41 73 83 83 83
Low hafnium zirconia revenue (US$m) - - 11 21 32 63 63 63 63 63 63
Ferro-niobium revenue (US$m) - - 21 26 30 33 33 57 66 66 66
Yttria stabilised zirconia revenue (US$m) - - - - 33 66 66 66 66 66 66
Dysprosium oxide revenue (US$m) - - 13 16 18 20 20 34 39 39 40
Hafnium oxide revenue (US$m) - - 20 24 27 30 30 30 30 30 30
Praseodymium oxide revenue (US$m) - - 7 9 10 11 11 19 21 21 21
Revenue from eight major products (US$m) - - 145 183 229 285 285 424 470 471 475
Total revenue from all products
(US$m)
- - 152 192 240 299 299 445 494 495 499
Opex (US$m) - - (106) (121) (132) (144) (145) (201) (243) (244) (244)
Sustaining capex (US$m) - - - - - - (0) (4) (1) - (0)
Development capex (US$m) (266) (307) - - - (246) (246) - - - -
Source: Edison Investment Research. Note: Data for 2031 to 2041 are not displayed due to space constraints.
Capex
At Tomingley we include LOM sustaining capex of US$33m, which is largely associated with the
underground mine development. The total development capex for stage 1 production at Dubbo is
A$808m. We forecast A$375m will be spent in 2020 and A$433m in 2021. Stage 2 is expected to
cost an additional A$692m in capex; we forecast A$346 will spent in 2025 and A$346m in 2026.
Over the LOM we include sustaining capex of A$28.6m with closure costs of A$29m.
Funding
In our model we present a scenario whereby Alkane secures the funding for the Dubbo Project in
the early part of FY20 (July to September 2019). However, it is important to note that the timing of
funding for the Dubbo Project will be driven by market conditions and the timeline for funding should
be considered to be fairly fluid at this stage.
In our funding assumptions for Dubbo, we have assumed a strategic partner acquires a 20%
interest in the project for A$54.5m in FY20. This A$54.5m represents 20% of the project’s NPV of
A$909m, as defined in the Dubbo Project’s engineering and financials update, which we discounted
by 70% to reflect what a potential partner could pay for an interest in a project at this stage of
development.
Based on our assumptions, the strategic partner’s contribution to stage 1 capex is A$161m, which
is paid between FY20 and FY22. This would leave Alkane funding the balance of A$647m. We
estimate that Alkane will finish FY19 with a net cash position of A$66.4m and generate an average
EBITDA pa of A$42m from Tomingley during FY20-22. Some of this will be used to fund ongoing
exploration costs and the sustaining capex at Tomingley and other requirements, but the rest can
be used toward the development of Dubbo. We have estimated the remaining A$535m is funded
through 60% debt (A$325m) and 40% equity (net of fees A$210m, A$221m gross). We assume an
interest rate of 10% for the debt and assume the equity (1.1bn shares) is issued at the current
share price of A$0.20, although based on discussions with management we note that they would
not consider issuing shares at the current share price and would be seeking a higher price for any
equity component to the Dubbo Project finance.
Alkane Resources | 12 February 2019 17
Valuation
Alkane trades on an EV per attributable contained ounce of gold in the resource estimate of
US$28/oz (100% interest in Tomingley and 10.2% interest in Calidus), which compares to an
average in-situ value of ASX-listed gold explorers of US$24/oz and a global average of US$16/oz
(see Gold stars and black holes) but does not take into account the Dubbo Project’s value.
Alkane trades on an EV per attributable tonne of TREO of £21/t for Dubbo not including zirconium,
ferro-niobium or hafnium, including these as a TREO equivalent it trades on an EV multiple of
£7.5/t. This compares to an average of £205.8/t for its REE peer group, although the range is very
broad at £1.4/t to £1,104/t (Exhibit 23). Hastings Technology Metals is perhaps Alkane’s closest
peer in terms of jurisdiction, development stage and size of contained TREO; it trades at an EV per
attributable tonne of TREO of £256.9/t.
Exhibit 23: REE peer group comparison
Total mineral resource estimate
Company EV
(£m) Project Stage Location
Ownership (%)
Tonnage (Mt)
TREO grade
(%)
Contained TREO
tonnage (t)
Attributable TREO
tonnage (t)
EV/attributable TREO tonnage
(£/t)
Peak Resources 20.5 Ngualla BFS Tanzania 75 214 2.2 4,609,600 3,457,200 5.9
Arafura Resources 14.6 Nolans DFS Australia 100 56 2.6 1,456,000 1,456,000 10.0
Greenland Minerals 15.4 Kvanefjeld FS Greenland 100 1,010 1.1 11,110,000 11,110,000 1.4
Hastings Technology Metals
52.8
Yangibana DFS Australia 94 10 1.2 126,209 118,643 256.9
Brockman Resource
Australia 100 41 0.2 86,940 86,940
Mkango Resources 5.9 Songwe Hill PFS Malawi 51 49 1.4 661,850 337,544 17.5
Texas Mineral Resources Corp
9.1 Round Top PEA US 100 806 0.1 525,436 525,436 17.3
Rare Element Resources 7.5 Bear Lodge PFS US 100 45 2.7 1,242,000 1,242,000 6.0
Northern Minerals 47.6 Browns Range
DFS Australia 100 9 0.6 56,663.0 56,663 840.2
Ucore Rare Metals 21.0 Bokan Resource
US 100 3 0.6 19,034 19,034 1,104.2
Avalon Advanced Materials 8.7 Nechalacho FS Canada 100 305 1.4 4,147,699 4,147,699 2.1
Commerce Resources 10.5 Ashram PEA Canada 100 249 1.9 4,686,113 4,686,113 2.2
Average Average 205.8
Alkane Resources 13.9 Dubbo BFS Australia 100 75 0.9 661,584 661,584 21.0
TREO equivalent 2.5 1,845,228.5 1,845,228.5 7.5
Source: Edison Investment Research
We value Alkane Resources’ projects using discounted dividend analysis and include the current
market valuation of its holding in Calidus Resources. We value the Tomingley project at
A$0.26/share on a fully diluted basis, including the company’s end-December cash position of
A$73.7m. We use a discount rate of 10% and assume cost of debt of 10%. Alkane’s interest in
Calidus Resources adds another A$0.01/share.
Assuming Alkane can secure the development funding for Dubbo in H119 and that the prices of
zirconium, TREO, ferro-niobium all improve to the level expected by the company over the next
three years, our valuation would increase by A$0.17/share to A$0.44/share on a fully diluted basis.
This would imply an upside of 121% to the current share price (Exhibit 24).
Exhibit 24: Alkane Resources valuation summary
(A$/share)
Dividend discount valuation of Tomingley project 0.26
Dividend discount valuation of Dubbo Project 0.18
Market valuation of investment in Calidus Resources 0.01
Total valuation of Alkane Resources 0.44
Current share price 0.20
Upside/(downside) (%) 120.8
Source: Edison Investment Research
Alkane Resources | 12 February 2019 18
Valuation sensitivities
We stress-tested our valuation of Alkane Resources for variations of ±10% and ±20% for capex,
opex, price of shares issued for the purpose of the modelled equity raise, interest rate on debt and
metals prices (Exhibit 25 and Exhibit 26). The biggest influences on our valuation of Alkane are
metal and mineral prices and the share price used in our assumptions (Exhibit 25 and Exhibit 26).
Changes in opex have a moderate impact on our valuation, whereas changes in capex and
potential interest rates on debt have a relatively minor effect.
A 20% reduction in metal and mineral prices results in a total valuation of Alkane of A$0.12 per
share, which is below its current share price, A$0.20. Downside changes in all the other variables
ranged between A$0.29 and A$0.42 per share, well above Alkane’s current share price. Upside
changes in all variables ranged between A$0.73 and A$0.43 per share, demonstrating potential
improvements to our valuation (Exhibit 25 and Exhibit 26).
Exhibit 25: Changes in valuation caused by changes in each key variable
Source: Edison Investment Research
Exhibit 26: Changes in valuation (A$) caused by changes in each key variable
Variable Capex Opex Share price for equity funding
Interest rate on debt
Metal/mineral price
20% 0.36 0.29 0.47 0.42 0.73
10% 0.39 0.36 0.45 0.42 0.58
Base case 0.44 0.44 0.44 0.44 0.44
-10% 0.47 0.50 0.41 0.43 0.28
-20% 0.50 0.58 0.38 0.44 0.12
Source: Edison Investment Research
Financials
Near-term production and expectations
In H1 FY19, gold production totalled 26,745oz at an AISC of A$1,005/oz Au, while gold sales
totalled 30,497oz Au, generating revenue of A$52.4m at an average sales price of A$1,717/oz Au.
At the end of Q2 FY19, the company had a net cash position of A$73.7m.
In FY19, we forecast that Alkane will produce 40,000oz Au, down 49% y-o-y from 78,533oz Au in
FY18. We forecast an AISC of c A$1,150/oz Au, up 15%y-o-y, compared with an AISC of
A$1,002/oz Au in FY18. In FY19 we forecast gold sales of 41,500oz, down 45% y-o-y from
75,507oz in FY18, generating revenue of A$73.9m, down 43% y-o-y from A$130m in FY18 with
EBITDA of A$21.2m, down 69% from A$68.6m in FY18. Our forecast average sales price per ounce
of gold is A$1,756/oz Au, up 3% from A$1,706/oz Au in FY18.The reduction in gold production,
revenue and EBITDA is driven by transitioning from open pit to underground operations.
0.12
0.22
0.32
0.42
0.52
0.62
0.72
0.82
20% 10% Base Case -10% -20%
A$
Capex Opex Share price Interest rate Metal/Mineral price
Alkane Resources | 12 February 2019 19
Longer-term forecasts
Assuming Alkane secures the required funding early in FY20, we forecast that stage 1 production at
Dubbo will start in FY22 and continue to FY26, with the mine producing an average per year of
3,706t of zirconium oxychloride; 402t of neodymium oxide; 1,800t of low hafnium zircon; 857t of
ferro-niobium; 1,577t of yttria stabilised zirconia; 53t of dysprosium oxide; 44t of hafnium oxide; and
103t of praseodymium oxide (Exhibit 27).
Stage 2 production at Dubbo will commence in FY27 and continue to FY41, with the mine
producing an average per year of: 10,167t of zirconium oxychloride; 914t of neodymium oxide;
3,000t of low hafnium zircon; 1,958t of ferro-niobium; 3,153t of yttria stabilised zirconia; 120t of
dysprosium oxide; 50t of hafnium oxide; and 235t of praseodymium oxide (Exhibit 27).
Exhibit 27: Alkane Resources’ forecast production data
Source: Edison Investment Research
We forecast that Tomingley will generate average revenue of US$45m per year between FY19 and
FY22 when the mine is due to close, though exploration success could extend this (Exhibit 28). We
forecast that during stage 1 at Dubbo, it will generate an average revenue per year of US$237m. In
terms of average revenue per product per year we forecast US$37m from zirconium oxychloride;
US$36m from neodymium oxide; US$38m from low-hafnium zircon; US$29m from ferro-niobium;
US$33m from yttria stabilised zirconia; US$17m from dysprosium oxide; US$26m from hafnium
oxide; and US$9m from praseodymium oxide (Exhibit 28).
During stage 1 at Dubbo, we forecast the mine will generate an average revenue per year of
US$492m. In terms of average revenue per product per year we forecast US$102m from zirconium
oxychloride; US$82m from neodymium oxide; US$63m from low-hafnium zircon; US$65m from
ferro-niobium; US$66m from yttria stabilised zirconia; US$39m from dysprosium oxide; US$30m
from hafnium oxide; and US$21m from praseodymium oxide (Exhibit 28).
-
10,000
20,000
30,000
40,000
-
5,000
10,000
15,000
20,000
25,000
2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041
Gold produced (oz)
Ton
nes
prod
uced
(t)
Zirconium oxychloride produced (t) Neodymium oxide produced (t) Low hafnium zirconia produced (t)
Ferro-niobium produced (t) Yttria stabilised zirconia produced (t) Dysprosium oxide produced (t)
Hafnium oxide produced (t) Praseodymium oxide produced (t) Gold produced (oz)
Alkane Resources | 12 February 2019 20
Exhibit 28: Alkane Resources forecasts revenue per product
Source: Edison Investment Research
Between FY19 and FY21, we forecast that Alkane will generate an average EBITDA per year of
A$30m while the Tomingley mine is operational (Exhibit 29). This increases during the ramp up of
production at Dubbo to A$66m in FY22 and FY23, which is the final year of production from
Tomingley. Between FY24 and FY27 we expect Alkane to generate an average EBITDA per year of
A$192m during stage 1 production at Dubbo (Exhibit 29). This increases during stage 2 production,
between FY27 and FY41, to an average EBITDA per year of A$336m (Exhibit 29).
Exhibit 29: Alkane Resources forecast EBITDA per year
Source: Edison Investment Research
Net cash
Alkane had net cash of A$72m at 30 June 2018 and A$73.7m at 30 December 2018. We forecast
that the company will have a net cash position of A$66.5m at 30 June 2019.
-
200
400
600
2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041
Gold revenue (US$m) Zirconium oxychloride revenue (US$m)Neodymium oxide revenue (US$m) Low hafnium zirconia revenue (US$m)Ferro-niobium revenue (US$m) Yttria stabilised zirconia revenue (US$m)Dysprosium oxide revenue (US$m) Hafnium oxide revenue (US$m)Praseodymium oxide revenue (US$m) Revenue from other products (US$m)
2017A 2019E 2021E 2023E 2025E 2027E 2029E 2031E 2033E 2035E 2037E 2039E 2041E-
100
200
300
400
EB
ITD
A (A
$m)
Alkane Resources | 12 February 2019 21
Exhibit 30: Financial summary
A$’000s 2017 2018 2019e 2020e 2021e 2022e
30 June IFRS IFRS IFRS IFRS IFRS IFRS
INCOME STATEMENT
Revenue 117,792.0 129,974.0 73,904.4 47,935.9 69,860.3 172,877.6
Cost of Sales (57,073.0) (51,304.0) (43,686.7) (26,739.4) (36,730.4) (104,916.4)
Gross Profit 60,719.0 78,670.0 30,217.7 21,196.5 33,130.0 67,961.1
EBITDA 49,333.0 68,578.0 20,717.7 11,506.5 23,246.2 57,879.7
Normalised operating profit 7,607.0 32,107.0 13,464.5 4,071.6 0.0 0.0
Amortisation of acquired intangibles 0.0 0.0 0.0 0.0 0.0 0.0
Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0
Share-based payments 0.0 0.0 0.0 0.0 0.0 0.0
Reported operating profit 7,607.0 32,107.0 13,464.5 4,071.6 0.0 0.0
Net Interest (1,035.0) (603.0) 798.1 (2,336.4) (24,199.7) (32,122.5)
Joint ventures & associates (post tax) 0.0 0.0 0.0 0.0 0.0 0.0
Exceptionals (40,140.0) (188.0) 0.0 (1,200.0) 33,912.8 0.0
Profit before tax (norm) 6,572.0 31,504.0 14,262.6 1,735.2 (24,199.7) (32,122.5)
Profit before tax (reported) (33,568.0) 31,316.0 14,262.6 535.2 9,713.1 (32,122.5)
Reported tax 4,631.0 (6,845.0) (3,390.7) (8,912.0) 0.0 0.0
Profit after tax (norm) 11,203.0 24,659.0 10,872.0 (7,176.8) (24,199.7) (32,122.5)
Profit after tax (reported) (28,937.0) 24,471.0 10,872.0 (8,376.8) 9,713.1 (32,122.5)
Minority interests 0.0 0.0 0.0 0.0 0.0 0.0
Discontinued operations 0.0 0.0 0.0 0.0 0.0 0.0
Net income (normalised) 11,203.0 24,659.0 10,872.0 (7,176.8) (24,199.7) (32,122.5)
Net income (reported) (28,937.0) 24,471.0 10,872.0 (8,376.8) 9,713.1 (32,122.5)
Basic average number of shares outstanding (m) 503 506 506 550 853 1,366
EPS – basic normalised ($) 0.02 0.05 0.02 (0.01) (0.03) (0.02)
EPS – diluted normalised ($) 0.02 0.05 0.02 (0.01) (0.03) (0.02)
EPS – basic reported ($) (0.06) 0.05 0.02 (0.02) 0.01 (0.02)
Dividend ($) 0.00 0.00 0.00 0.00 0.00 0.00
Revenue growth (%) N/A 10.3 (43.1) (35.1) 45.7 147.5
Gross margin (%) 51.5 60.5 40.9 44.2 47.4 39.3
EBITDA margin (%) 41.9 52.8 28.0 24.0 33.3 33.5
Normalised operating margin (%) 6.5 24.7 18.2 8.5 0.0 0.0
BALANCE SHEET
Fixed assets 148,474.0 138,275.0 156,450.1 339,396.7 740,365.7 911,927.7
Intangible assets 83,107.0 93,136.0 103,136.0 94,508.8 104,508.8 114,508.8
Tangible assets 60,627.0 36,266.0 39,674.5 230,748.3 621,217.3 782,779.3
Investments & other 4,740.0 8,873.0 13,639.6 14,139.6 14,639.6 14,639.6
Current assets 54,276.0 93,306.0 75,417.6 18,034.6 27,544.4 26,234.6
Stocks 9,644.0 19,153.0 2,834.7 1,838.6 2,679.6 6,630.9
Debtors 2,445.0 2,030.0 6,074.3 3,939.9 5,741.9 14,209.1
Cash & cash equivalents 41,969.0 72,003.0 66,508.6 11,636.1 18,002.8 3,774.5
Other 218.0 120.0 0.0 620.0 1,120.0 1,620.0
Current liabilities (19,335.0) (27,430.0) (18,272.8) (23,386.5) (36,386.5) (45,703.2)
Creditors (11,166.0) (9,299.0) (3,590.7) (2,197.8) (3,018.9) (8,623.3)
Tax and social security 0.0 (6,929.0) (1,672.1) (4,395.0) 0.0 0.0
Short-term borrowings 0.0 0.0 0.0 0.0 0.0 0.0
Other (8,169.0) (11,202.0) (13,010.0) (16,793.8) (33,367.6) (37,079.9)
Long-term liabilities 18,488.0 13,647.0 13,647.0 (21,353.0) (246,353.0) (311,353.0)
Long-term borrowings 0.0 0.0 0.0 (35,000.0) (260,000.0) (325,000.0)
Other long-term liabilities 18,488.0 13,647.0 13,647.0 13,647.0 13,647.0 13,647.0
Net assets 201,903.0 217,798.0 227,242.0 312,691.8 485,170.5 581,106.1
Minority interests 0.0 0.0 0.0 0.0 0.0 0.0
Shareholders' equity 201,903.0 217,798.0 227,242.0 312,691.8 485,170.5 581,106.1
CASH FLOW
Operating cash flow before WC and tax 49,333.0 68,578.0 20,717.7 11,506.5 23,246.2 57,879.7
Working capital 5,518.0 (9,498.0) 6,565.7 1,737.5 (1,821.8) (6,814.2)
Exceptional & other 672.0 2,823.0 500.0 500.0 500.0 500.0
Tax 0.0 (6,845.0) (8,647.6) (6,189.1) (4,395.0) 0.0
Net operating cash flow 55,523.0 55,058.0 19,135.8 7,554.9 17,529.4 51,565.5
Capex (33,551.0) (9,224.0) (10,661.7) (199,008.7) (414,215.1) (219,941.7)
Acquisitions/disposals 53.0 0.0 0.0 54,540.0 0.0 0.0
Net interest (1,035.0) (603.0) 798.1 0.0 (2,336.4) (24,199.7)
Equity financing 3,471.0 (5.0) 0.0 20,000.0 110,000.0 80,000.0
Exploration and Evaluation (10,154.0) (10,969.0) (10,000.0) (10,000.0) (10,000.0) (10,000.0)
Other 2,963.0 (4,317.0) (4,766.6) 37,041.3 80,388.9 43,347.6
Net cash flow 17,270.0 29,940.0 (5,494.4) (89,872.5) (218,633.2) (79,228.3)
Opening net debt/(cash) (24,455.0) (41,969.0) (72,003.0) (66,508.6) 23,363.9 241,997.2
FX 0.0 0.0 0.0 0.0 0.0 0.0
Other non-cash movements 244.0 94.0 0.0 0.0 0.0 0.0
Closing net debt/(cash) (41,969.0) (72,003.0) (66,508.6) 23,363.9 241,997.2 321,225.5
Source: Edison Investment Research
Alkane Resources | 12 February 2019 22
Contact details Revenue by geography
89 Burswood Road Burswood WA 6100 Australia 61 8 9227 5677 www.alkane.com.au
N/A
Management team
Non-executive chairman: Ian Jeffrey Gandel Managing director: Nic Earner
Mr Gandel is a successful businessman with extensive experience in retail management and retail property. Mr Gandel has been an investor in the mining sector for 25 years and is a substantial shareholder in a number of publicly listed Australian companies.
Mr Earner is a chemical engineer with 21 years’ experience in technical and operational optimisation and management. He has held a number of executive roles in mining and processing.
Technical director: David Ian Chalmers Non-executive director: Anthony Dean Lethlean
Mr Chalmers is a geologist who has worked in the mining and exploration industry for over 40 years. He has experience in all facets of exploration and mining through feasibility, development and production.
Mr Lethlean is a geologist with over 10 years’ mining experience. He has also worked as a resources analyst with various stockbrokers and investment banks. He was a founding director of Helmsec Global Capital, which seeded, listed and funded a number of companies in a range of commodities.
Non-executive director: Gavin Smith
Mr Smith is an accomplished senior executive and non-executive director within multinational business environments. He has more than 35 years’ experience in information technology, business development, and general management in a wide range of industries and sectors.
Principal shareholders (%)
Ian Gandel 22.0
Companies named in this report
Peak Resources (PEK:AU); Arafura Resources (ARU:AU); Greenland Minerals (GGG:AU); Hastings Technology Metals (HAS:AU); Mkango Resources (MKA.CN); Texas Mineral Resources Corp (TMRC:US); Rare Element Resources (REEMF:US); Northern Minerals (NTU:AU); Ucore Rare Metals (UCU:CN); Avalon Rare Metals (AVLNF:US); Commerce Resources (CCE:CN); Calidus Resources (CAI:AU).
Alkane Resources | 12 February 2019 23
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