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Alkane Resources' Tomingley gold paves way for Dubbo rare earths story

The date of: 2019-02-28
viewed: 2

Source:Proactive Investors Australia

What does Alkane Resources do?

Alkane Resources Ltd (ASX:ALK) (FRA:AK7) (OTCMKTS:ALKEF) (OTCMKTS:ANLKY) specialises in gold production and multi-commodity project exploration and development, including rare earths, in Australia.

It is run by managing director Nic Earner, a chemical engineer with more than 20 years experience in technical and operational optimisation work and management.

Earner boasts an operations manager posting at what is now Aeris Resources Ltd (ASX:AIS) on his CV and he was a manager at big miner Rio Tinto Limited (ASX:RIO) (LON:RIO) (NYSE:RIO). He previously held a variety of roles at BHP Group PLC (ASX:BHP) (LON:BHP) (NYSE:BHP) acquisition WMC Resources at the Olympic Dam project in South Australia.

What does Alkane Resources own?

The key asset is the flagship Dubbo Rare Earths Project in Central West NSW, which is based on a large in-ground resource of zirconium, hafnium, niobium and rare earth elements.

Dubbo has an 18.9 million tonne ore reserve and 75.18 million tonne resource, giving an estimated 20-year project life at a 1 million tonnes a year plant feed rate.

The financially-viable project could generate $4.7 billion before tax in undiscounted free cash flow with its 20-year base case.

Alkane has said the Dubbo resource could be mined at the million-tonne nameplate capacity for more than 75 years, meaning a long life and expansions could be on the cards for any operator or developer.

The project’s pre-tax net present value (NPV8) was forecast at between $909 million and $1.297 billion at an 8% discount rate, depending on the development route.

Dubbo project's 20-year base case of 1 million tonnes a year required a $1.3 billion capital expenditure (capex) and $124 million sustaining capital to generate $663 million revenue from $341 million operating costs.

Earnings before interest, tax, depreciation and amortisation (EBITDA) was put at $320 million while the internal rate of return (IRR) was 17.5% for a $1.24 billion NPV8 before tax.

Alkane hopes to take a two-stage approach to ramp-up, starting annual production at 500,000 tonnes.

The company previously argued its proposed modular approach to start-up would involve large elements of off-site construction, reducing build time and start-up capex.

A staged build would attract an $808 million capital cost for stage I, $692 million for stage II and $39 million extra of sustaining capital over the 20 years to put pre-tax NPV at $909 million and IRR at 16.1%.

Alkane has secured the project land and obtained regulatory approvals, including state and federal environmental approvals and approval to build the mine.

The company has also completed project engineering, running a pilot plant at the Australian Nuclear Science and Technology Organisation facility in Sydney for more than a decade.

Alkane, which has a market capitalisation of $103.75 million, has previously expressed its hopes at finding an offtake partner for the project, an important financial milestone.

The company noted last month its financing effort was continuing in a volatile global market.

It highlighted in its December quarter activities report increased environmental legislation had affected Chinese zirconium chemicals and powders supply.

The company flagged ferro-niobium prices had stayed high as steel companies continue to look to substitute also-short ferrovanadium supplies.

China’s rare-earth permanent magnet industry is continuing to forecast increasing demand.

Alkane’s production asset is the Tomingley gold mine near Dubbo, which is owned by another subsidiary, Tomingley Gold Operations.

The asset has brought in significant revenue to the company to support its exploration and development efforts.

Alkane had a cash flow of more than $40 million in the 2017-18 financial year, writing a profit of $24 million and claiming earnings of 4.8 cents a share.

Gold sales were $40.9 million in the December quarter, with 23,841 ounces going towards the revenue results for an average price of $1,716 an ounce.

The production level was 11,111 ounces, exceeding forecasts, as site operating cash costs sat at $846 an ounce for all-in sustaining costs (AISC) of A$1,051 an ounce.

Alkane’s third subsidiary, Toongi Pastoral Company, managed about 3,000 hectares of residual farmland, assets and biodiversity offset areas associated with the Dubbo project.

Significant shareholder Calidus Resources Ltd (ASX:CAI) upped its stake in Alkane to 10.19% by December 20 in a $558,328 series of on-market trades made in the December quarter.

Western Australian company Alkane paid a $400,000 break fee in the quarter to not proceed with its planned investment in the listed gold exploration company Explaurum Limited (ASX:EXU).

Alkane had $73.7 million cash on December 31 and expects to spend $24 million in the March quarter.

A $10.1 million sum is flagged for production while $5.8 million is budgeted for exploration and another $5.8 million for development.

Inflection points

Funding and commitment for Dubbo project

Uptake of electric vehicles generally and rare earth shares of the battery metals mix

Ongoing earnings milestones at Tomingley gold mine

Commodity cycles and demand-and-supply pressures for gold and battery metals

Government policy on farmland management and environmental offset requirements

Managing director Nic Earner confident of project and company potential

“We are financially well positioned to persist to seek an offtake at fair terms, and are interfacing with the Australian Government and Export Credit Agencies to further our project,” chairman Ian Gandel told shareholders on the day of the company’s November annual meeting.

“Your board remains very optimistic in the prospects for the Dubbo project and, more broadly, for your company.”

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