Alkane Resources — Boda bodes well

Alkane has announced a number of developments since our last note on the company (Reborn, published on 3 September), including:

This note considers each in turn and updates our valuation of Alkane accordingly.

Gold sold at Tomingley’s in Q121 was within 70oz (0.6%) of our prior forecast, although 446oz was effectively sold out of inventory and ore milled was 12.0% higher than our forecast and the grade 16.1% lower. Nevertheless, the overall result in terms of both cost and output was extremely close to both our prior expectations and Alkane’s pro rata guidance for the full year (of 45–50koz gold at an AISC of A$1,450–1,600/oz). A summary of both Alkane’s Q121 results and our forecasts for the remaining quarters of the year, plus our updated forecast for the full year is provided in the table below.

Among other things, readers should note our relatively conservative assumption that the price of gold will fall to US$1,749/oz (in real terms) in CY21 (and therefore ALK’s H221) coupled with a stronger Australian dollar (vs US dollar) than at any time since July 2018 (this forex rate recorded a recent peak of A$1.7408/US$ on 19 March 2020).

A summary of our estimate of Alkane’s FY21 results in the light of its Q121 operating activities report plus our quarterly forecasts, as shown in Exhibit 1 is shown in the table below. There is an anomaly whereby Alkane’s H119, FY19 and H120 results were reported with its recently demerged Australian Strategic Materials’ (ASM) numbers fully consolidated, but its FY20 results were reported with ASM reflected as ‘classified as held for distribution to owners’ and/or ‘discontinued’. The consequences of this are most obviously apparent in the line items entitled ‘loss after tax from discontinued operations’. However, this is not considered material enough to significantly detract from the overall trends apparent from the figures.

On 4 November, Alkane announced an update to its maiden mineral resource estimate at Roswell. Roswell’s maiden mineral resource estimate was announced on 28 January and was considered in our report, 007 strikes it rich, published on 23 April. The resource estimate has been calculated with a nominal 20m drill hole spacing to depths averaging c 350m below ground surface. A comparison of the updated resource with the original is provided in Exhibit 3, below. Of particular note, in addition to the expansion of the overall resource, is the promotion of (effectively) more than 100% of the resources in the inferred category into the indicated category, from which they are then eligible to be subsequently promoted into reserves (unlike resources in the inferred category):

The resource definition drilling programme at Roswell (and San Antonio – see below) is ongoing as part of an extensive regional exploration programme aimed at providing future additional ore feed, either from surface or underground, to the Tomingley mill, approximately 3km to the north of Roswell. At the current milling rate of 1.0Mtpa, resources at Roswell are capable of supporting a 10.1 year increase in the life of operations at Tomingley. Pro-rata with Tomingley’s existing reserve and resource ratio (see Alkane Resources: Reborn, published on 3 September), Roswell’s resources could convert into a reserve of 3.2Mt at 1.94g/t containing 188koz gold and could therefore be sufficient to support an additional 3.2 years of production. However, a reserve estimate performed solely on this basis may be unduly conservative. Whereas the Roswell resource is 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, of which c 179koz are included in the underground mine plan (Edison assumption), which suggests that a more appropriate conversion factor would be in the order of 67% ((434+179)/921), in which case, Roswell’s resource could convert into a reserve in the order of 6.7Mt, containing 442koz gold at a grade of 1.94g/t, and be sufficient to support production for an additional 6.7 years alone (cf Alkane’s target of 10 years, with exploration still ongoing). Resources could then extend this by an additional 3.4 years. Note that Roswell’s resource grade of 2.04g/t and our estimated reserve grade derived from that number of 1.94g/t compares favourably with Tomingley’s existing underground reserve grade of 2.0g/t, despite a lower cut-off level of 0.5g/t (cf 2.5g/t).

Although resource drilling at Roswell is now nearing completion, the resource nevertheless remains open for extensions at depth and will be subject to further infill and extensional drilling with a view to both defining the continuity of the mineralisation in the high-grade zones in southern Roswell at depth, to the north and to the west, within the poorly constrained western monzodiorite. In the meantime, land acquisitions have taken place, an underground exploration drive from Tomingley to Roswell is under development and consultation, permitting and licensing to facilitate expedited mining is underway with the relevant stakeholders and New South Wales government.

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. 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).

The San Antonio deposit is a continuation of the Roswell mineralised zone to the south of the Rosewood fault and, on 20 April, Alkane announced a maiden resource at San Antonio. Together, the Roswell and San Antonio resources now comprise a 17,990 kt resource (cf 14,940kt previously) at an average grade of 1.93g/t (cf 1.87g/t previously), containing 1,114koz gold (cf 898koz previously). Moreover, the tonnage of the resource at Roswell now exceeds the upper bound of its target range by 62.4% in terms of tonnage and by 74.3% in terms of contained gold at a grade that is 7.3% higher:

Alkane’s resources at Tomingley amount to 9.4Mt at a grade of 1.9g/t, containing 610koz gold. As such, the combined resources at Roswell and San Antonio increase Alkane’s aggregate group resources by more than 180%.

In terms of mine life, at a milling rate of 1Mtpa, Roswell and San Antonio’s resources could therefore potentially add 18 years to the life of operations at Tomingley (cf 14 years previously). Pro-rata with Tomingley’s existing reserve and resource ratio, Roswell and San Antonio’s resources could convert into a reserve of 5.6Mt at 1.84g/t containing 317koz gold and therefore be sufficient to support an additional 5.6 years of production (cf 4.7 years previously). As before, however, a reserve estimate performed solely on this basis may be unduly conservative as it is conducted on a post-mining, rather than a pre-mining, basis. At a 67% conversion basis (see above), Roswell and San Antonio’s reserves combined could prove to be in the order of 12.1Mt (cf 9.0Mt previously), containing 746koz gold (cf 539koz previously) at a grade of 1.93g/t (cf 1.87g/t previously), sufficient to support production for an additional circa 12 years (cf Alkane’s target of 10 years, with exploration still ongoing). Note that the resources at San Antonio will need to be upgraded from the inferred category into the indicated category, before they are eligible for conversion into reserves, which is expected later this month.

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 resources combined (ie 1,114koz – see Exhibit 4)) at US$26.8m (cf US$21.6m previously), or A$36.1m (cf A$30.0m previously), or 6.1 Australian cents per share (cf 5.0cps previously).

Exhibit 5 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 El Paso) in the event that it hits its exploration targets:

These valuations in Exhibit 5 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.

On 9 November, Alkane reported the assay results of an additional five diamond drill holes (denoted DD) at its Boda prospect at its Northern Molong Porphyry Project and a further six reverse circulation (RC) holes. The drilling is part of a 30,000m (5,974m) diamond and RC core exploration programme that began in July 2020 to test the dimensions and extensions to the large, low grade mineralised envelope at Boda, as well as any internal high-grade zones.

A summary of all 11 holes is as follows:

For the purposes of Exhibit 6, multiple intersections have been amalgamated and grades averaged according to the width of the individual intersections.

The most obvious, immediate consequence of the most recent drilling at Boda is to have doubled the north-south strike length of the system from 500m to 1,000m, as demonstrated by the fact both holes KSDD022 and holes KSRC031-037 continued to intersect broad widths of mineralisation to the south of KSDD009 (see Exhibit 7). Note that the results from KSDD022 were particularly significant as the hole intersected a large pyrite shell comprising stringers and aggregates of pyrite within a sequence of propylitic altered basaltic andesites and monzodiorite sills and dykes. In this case, the thick intersection of strong gold mineralisation with anomalous copper and pathfinder elements could be indicative of a distal component to a new large fertile magmatic system (Boda Two).

At first glance, the results of these holes suggest either an extension of the original system or a whole new system. In terms of our attempts to estimate a mineralised inventory from the results of the holes drilled, however, it highlights a complication, which is that, almost without exception, the results from the RC holes demonstrate lower widths and grades than those from the diamond core drill holes. A summary of this effect may be seen in Exhibit 8:

In general, it can be seen from these results that RC drill hole intercepts are, on average, 37% of the (downhole) width of diamond drill hole intercepts, while gold grades are 59% and copper grades 77% of those recorded in diamond drill cores. In general, this may be attributed to the zonation of the system being tested and the fact that the RC drill holes are testing the upper part of the system, where grades are anyway anticipated to be lower (as is typical of this type of porphyry system). In addition, some of the RC drill holes are pre-collars for subsequent diamond drill holes in order to reduce the overall cost of the holes (NB Alkane has mobilised a second diamond drill rig to Boda for this purpose). Of note within this context is the fact that four RC holes (KSRC031, KSRC032, KSRC037 and KSRC038) finished in mineralisation and that two of these holes (KSRC032 and KSRC038) will be extended by diamond tails at a later date.

Exhibit 9 updates our estimates of the potential mineralised inventory implied by the updated drilling results at Boda. In recognition of the difference between RC and diamond drill results however, we have included two updated estimates – one based on the whole population of results (in the Updated column) and the other based on the results of the diamond drill holes only (as was the case for our estimates of 3 September and 23 April as well).

Within this context, it is worth noting the like-for-like increase in the upper end of our estimate of the potential resource at Boda, as represented by the ****Updated and ****Surface column projections (cf Exhibit 10 in our last note on the subject, Reborn, published on 3 September) primarily as a result of the increase in our estimate of the strike length of the deposit and, as a result, our estimate of the surface projection of the Boda mineralisation at >0.2g/t AuE (see Exhibit 7).

In broad terms, we are happy to state that (given the information available), our best estimate of the overall size of the Boda deposit is 533–2,241Mt (cf 575–738Mt previously) at an average gold grade of 0.26–0.35g/t (cf 0.34–0.35g/t previously) containing 4.5–12.3Moz Au (cf 6.4–8.3Moz previously) 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. However, in this case, we are also happy to state we believe there is an increasing likelihood that the ultimate result will be a resource in the region 6.4–9.0Moz.

A summary of our estimates and the calculations from which they are derived is provided in the table below and is compared with the resources disclosed by Newcrest for Cadia Ridgeway c 100km to the south (see Exhibit 10).

Clearly such an estimate is very far from being anything close to JORC code-compliant and experience would suggest such estimates have an accuracy of approximately ±75%. However, the increasing number of results in the region of 6.4–9.0Moz 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, 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$0.24–0.67/share at updated forex rates (cf A$0.36–0.47/share previously).

In the meantime, drilling is testing identified anomalies at Kaiser and an area about 5km in length to the south of Boda, as well as other regional targets within the 15km monzonite intrusive corridor that extends from Boda to Finns Crossing defined by both the 3D-IP survey and existing Alkane data, with the next round of results anticipated to be reported later this month.

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 10).

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 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 Northern Molong Porphyry Project 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 11) 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.

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 and the BIC. Specifically, gold mineralisation has been discovered at Kaiser, Boda and Glen Hollow (which is part of Comobella), with recent drilling identifying multiple phases of monzonite to monzogabbro intrusion that are plumbing a northwest structural corridor hosting extensive (calc-)potassic alteration and significant gold-copper mineralisation. In this case, the northwest orientation of the structural zones is significant in that similarly oriented structural zones are important controls to Macquarie Arc alkali gold-copper porphyry mineralisation such as the Lachlan Transverse Zone at the Cadia Valley (and Northparkes) deposits. Within this context, the alteration at Boda suggests the prospect is positioned in the upper parts of an alkali porphyry system with high-level epithermal gold veins observed in some of the drilling coincident with strongly pyritic zones, while deeper drilling has defined strong pervasive hydrothermal alteration that is dominantly calc-potassic (ie, a biotite+actinolite+epidote+magnetite+chalcopyrite±kspar±bornite mineral assemblage) phasing out to a more distal propylitic alteration (albite+epidote+chlorite+pyrite±chalcopyrite).

Since February, Alkane has been acting in response to information supplied by state and federal authorities and complying with recommended measures to combat COVID-19. These include heightened cleaning protocols, social distancing, stringent hygiene practices and health screening.

Tomingley 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:

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.

On this basis, our valuation of the dividend stream potentially available to Alkane shareholders from its immediate Tomingley operations is now A$0.183/share (ie almost unchanged cf A$0.186/share previously). However, to this must be added the value of residual resources at the end of the life of operations, which we estimate to be 0.4Moz with a current value of US$10.2m (A$13.8m), or A$0.023/share, to bring our total valuation of Tomingley to A$0.206/share (including cash).

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

Note that the DPS columns in Exhibit 12 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.

Our valuation of Alkane is based on the present value of future dividends potentially 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 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 Tomingley (based on discounted dividends) increases as follows:

Hence, increasing the life of Tomingley by 11 years (ie the same as the amount implied by our conversion of Roswell and San Antonio resources into reserves on page 5) adds 27.0c to our valuation cf our 6.1c per share in-situ resource valuation, which approximates to just more 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 5). Note that updated resource statements for Roswell and San Antonio (including the promotion of existing resources from the inferred into the indicated category) are anticipated later in December, as are updated mine plans.

If the gold price remains at US$1,840/oz in flat real terms (ie the price at the time of writing cf US$1,695/oz average over ten quarters otherwise, in our financial model), then our valuation of Alkane (based on the present value of potential dividends payable to Alkane shareholders) increases by 2.5cps, or 13.7%, from 18.3 to 20.8 cents.

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