Alkane Resources — Boda resource estimate within five months

Since our last note in September, Alkane has:

This note updates our analysis of the company with respect to both announcements.

In its announcement of 22 October, Alkane reported the assay results of an additional four DD holes and an additional three RC holes at its Boda prospect at its Northern Molong Porphyry Project. The drilling is part of a 30,000m 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.

In general, the Boda porphyry system is a series of near-vertical, northwest striking, intrusive related breccias hosted within a thick sequence of shallowly east-dipping andesite lavas. These magmatic breccias are hydrothermal in nature and zone towards higher gold-copper grades when associated with a chalcopyrite±pyrite dominant cement. Exploration to date has identified that the northeast shoulder of Boda (see Exhibit 2) in particular has a shallow blanket of epithermal gold mineralisation associated with colloform quartz-carbonate veining and abundant pyrite, with gold grades as high as 18.6g/t (included in hole KSDD042) and it is this area of the deposit that all seven holes were designed to test.

A summary of the seven drill holes – totalling 5,322m (or 760m per hole) – is as shown in Exhibit 1.

Gold and copper intercepts were calculated using a lower cut of 0.1g/t Au and 0.05% Cu, respectively. Internal dilution (<cut-off) is less than 15% of reported intercepts. True widths are estimated as approximately 50% of intersected widths (see Alkane’s announcement).

At least four mineralised intrusive breccias have now been identified central to the Boda mineralisation, with drilling conducted with 50m spaced southwest-oriented drilling traverses with nominal 100m spaced drill holes (see Exhibit 2) to determine the strike and dip extensions of the deposit. Note that for the purposes of Exhibit 1, multiple intersections have been amalgamated and grades averaged according to the width of the individual intersections. In general, it may be seen that the four new DD holes reported widths of mineralisation that were wider and higher grade than those of previous holes, while the three RC holes reported widths that were narrower than previous holes, but grades that were, on average, higher than both previous RC holes and (unusually) the current round of diamond drill holes as well. As previously, the fact that DD holes continue to demonstrate wider overall intersections than their RC counterparts and extend to greater depths at higher grades may be attributed to the zonation of the system 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).

Full details of the assay results are included in Alkane’s announcement. However, a summary of the significant intersections from the diamond core drilling is:

Significant intersections from the RC drilling included:

A brief comparison between the results of the most recent assay results relative to those of comparable earlier holes – where comparison is possible – is provided in the table below:

Note that hole KSDD028 is significant for comparative purposes in that it was designed to intersect the north-west striking orebody at approximately 90°. The hole, collared in outer propylitic alteration, intersected a gold mineralised pyrite-sericite shell for approximately 300m downhole, which zoned in to extensive calc-potassic alteration with gold-copper (Au-Cu) mineralisation centred around a high-grade Au-Cu breccia. The breccia showed apparent sulphide zonation with the upper intercepts more pyrite rich, zoning towards the centre and at depth to more chalcopyrite rich with increasing Au-Cu grades, possibly vectoring towards a ‘causative’ intrusion to the Boda system.

Exhibit 4 updates our estimates of the potential mineralised inventory in the light of the seven new drill hole results at Boda. As previously, in recognition of the difference between RC and DD results, we have included two updated estimates: one based on the whole population of results and the other based on the results of the DD holes only. Our updated mineral inventory estimates are also compared with the resources disclosed by Newcrest for Cadia Ridgeway c 100km to the south (see Exhibit 9).

Given the information available, our best estimate of the overall size of the Boda deposit is broadly unchanged at 664–1,704Mt (cf 707–1,704Mt previously), albeit at a higher average gold grade of 0.26g/t (cf 0.25–0.26g/t previously) containing 5.5–11.0Moz Au plus copper (cf 5.7–11.0Moz previously), including a high grade sulphide cemented breccia of 3.5Moz (unchanged) at a grade above 3.0g/t AuE cut-off (see column entitled ‘High grade pod’).

Despite our interpretation of Alkane’s drilling results, clearly such estimates are very far from being anything close to JORC code-compliant and experience suggests they have an accuracy of approximately ±75%. Even the bottom end of this range, however, 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$0.30–0.59 per Alkane share.

The Boda Two and Boda Three prospects are defined by a 1,100m x 500m coincident gold-copper soil and magnetic high footprint with separate conductive induced polarisation (IP) anomalies.

A summary of the six holes drilled at Boda Two and Boda Three (see Exhibit 2 for orientation) is as follows:

Total metres drilled amounted to 2,953m, or an average of 492m per hole. As at Boda, multiple intersections have been amalgamated and grades averaged according to the width of the individual intersections. In addition, the one new diamond drill hole reported widths of mineralisation that were higher than those of its RC counterparts as well as being at higher grades (as expected). Otherwise, the five new RC holes generally reported both grades and widths that were higher than those of the previously reported RC hole (KSRC039), although readers should note that hole KSRC039 was drilled approximately 677m west-south-west of the Boda deposit (see Exhibit 2) to the far southwest of the area of mineralisation.

While lower grade with generally narrower widths than Boda itself, drilling at Boda Two and Three nevertheless demonstrates many similarities with Boda, including an extensive zone of low grade gold-copper porphyry mineralisation with breccias that zone to higher grades. As such, the most recent round of drill hole results confirm the mineralisation continues for many metres to the south of Boda and possibly much further with the potential for additional high grade zones. These breccias will be targeted with a second phase of drilling in CY22. In the meantime, our best estimate of the mineral inventory that may be encompassed by current drilling (using the same methodology as for Boda, above) is shown in Exhibit 6, below. Given the relatively sparse drilling conducted at Boda Two and Boda Three so far (seven holes over a strike length of approximately 617m), for the moment our estimate is based on the whole population of results, rather than discriminating between the results implied by the diamond drill holes compared with those implied by the RC drill holes. Our mineral inventory estimate is also compared with the resource disclosed by Newcrest for Cadia Ridgeway c 100km to the south (see Exhibit 9).

Applying the same methodology to our estimate of the possible mineral inventory contained at Boda (see Exhibit 4), our best estimate of the mineral inventory contained within the Boda Two and Boda Three prospects is a modest 148koz Au at an average grade of 0.12g/t (see Exhibit 6, above), although we recognise that much of the basis of this estimate is dependent on the relatively narrow widths of mineralisation hitherto intersected and the observation that ‘true widths are estimated as approximately 50% of intersected width.’ If intersections in this area ultimately increase to those implied by the deposit’s apparent 1,100m x 500m coincident gold-copper soil and magnetic high footprint with separate conductive IP anomalies, we believe a resource approximately 13.8x the size (ie 2,049koz; see column entitled ‘Alkane est. dimensions’ in Exhibit 6) could be delineated and, within this context, it is notable that hole KSRC046 ended in mineralisation.

As before, readers are cautioned that such estimates are very far from being anything close to JORC code-compliant and experience would suggest they have an accuracy of approximately ±75%. Within this context, we calculate a value for our current resource estimate of 148koz of A$0.01/share (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). In the event that the ultimate resource delineated expands to 2,049koz, we calculate a value for Boda Two and Boda Three of A$0.11/share.

Historic drilling has defined a broad area of extensive alteration with two main zones of calc-potassic alteration and associated gold-copper mineralisation in the Kaiser Zone, centred over the Kaiser workings, and the Duke Zone, 200m to the northeast and parallel to it. These two zones exhibit many of the same characteristics as the Boda prospect, including their alteration assemblages and zonation with a similar northwest trend to the hydrothermal system.

To date, the area mapped by drilling at the Duke Zone is c 250m wide by over 800m in strike length and open along strike and at depth, with the potential for a large tonnage, low grade, shallow resource 1.5m to the northwest of Boda. On 22 October, Alkane reported the assay results of an additional three DD holes and one RC hole at Kaiser, totalling 3,425m of aggregate drilling (an average of 856m per hole).

A summary of the four holes drilled at Kaiser and Duke, within the context of the results from holes previously drilled, is as follows:

As before, multiple intersections have been amalgamated and grades averaged according to the width of the individual intersections. Once again, it may be seen that the four new DD holes reported widths of mineralisation that were materially in excess of both those previously reported and comparable RC results, albeit at similar to lower gold grades and slightly lower copper grades.

On the basis of these results, our best estimate of the mineral inventory that may be encompassed by drilling at Kaiser (using the same methodology as for Boda, above) is shown in Exhibit 8, below. Note that, as with Boda Two and Boda Three, given the relatively sparse drilling conducted at Kaiser and Duke to date, for the moment our estimate is based on the whole population of results, rather than discriminating between the results implied by the diamond drill holes compared with those implied by the RC drill holes. Our mineral inventory estimate is also compared with the resource disclosed by Newcrest for Cadia Ridgeway c 100km to the south.

Applying the same methodology as to our estimate of the possible mineral inventory contained at Boda (see Exhibit 4), our best estimate of the mineral inventory contained within the Kaiser prospect is 702koz Au at an average grade of 0.28g/t (see Exhibit 8, above), albeit we recognise that this could more than double to 1,681koz if the drilling widths intersected ultimately increase to close to the 250m width mapped by drilling to date (see column entitled ‘Alkane est. dimensions’).

As before, readers are cautioned that such estimates are very far from being anything close to JORC code-compliant and experience would suggest they have an accuracy of approximately ±75%. Within this context, we calculate a value for our current resource estimate of 702koz of A$0.04/share (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). If the ultimate resource delineated expands to 1,681koz, we calculate a value for it of A$0.09/share.

The Northern Molong Porphyry Project is 100% owned by Alkane, covers c 115km2 of the northern Molong Volcanic Belt and is around 80km to the north-east of its Tomingley Gold Mine, in Central West New South Wales (Exhibit 9).

To date, Alkane’s drill results at Boda have shown both a similar stratigraphic sequence and style of alteration and mineralisation to Newcrest’s Cadia Province mines 110km to the south, although it is also more structurally complex. Nevertheless, the Cadia Province mines host a JORC-compliant mineral resource estimate of 36.1Moz Au at a grade of 0.35g/t Au and 8.2Mt of copper at a grade of 0.26% Cu plus silver and molybdenum and produced 843koz of gold in FY20 at an AISC of US$160/oz Au (net of by-product credits) to generate US$991m in free cash flow.

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, denoted Kaiser, Boda, Comobella, Driell Creek and Finns Crossing, all within a 15km north-west to south-east trending corridor (Exhibit 10) and all close to road, rail, gas and water infrastructure. Importantly, the Boda anomaly correlates with a historical IP survey completed by CRA Exploration (now Rio Tinto) over the Boda Intrusive Complex (BIC). This survey showed a strong high chargeable anomaly along the northern edge of the survey area coincident with the magnetic anomaly, as a result of which Alkane subsequently completed a 70-line kilometre IP survey over the 6km strike extensions of the BIC to generate drilling targets.

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 north-west structural corridor hosting extensive (calc-)potassic alteration and significant gold-copper mineralisation. In this case, the north-west 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).

Production of 56,958oz gold at Alkane in FY21 at an AISC of A$1,320/oz was materially ahead of the company’s most recent guidance of 50–55koz at an AISC of A$1,400–1,550/oz and its original guidance of 45–50koz gold at an AISC of A$1,450–1,600/oz. Production in Q122 (which was announced on 29 October) was 12,141oz at an AISC of A$1,961/oz cf guidance for FY22 of 55–60koz at an AISC of A$1,450–1,600/oz. However, this production result was within budget, which anticipated mining lower grade stopes late in the quarter, before progressing to higher grade stopes in October. A summary of Alkane’s recent quarterly results plus our estimate of those required in each of the remaining three quarters for it to hit approximately the middle of its guidance range for the full year is provided in the table below:

As previously, 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 plan (including Roswell and San Antonio) discounted back to present value at a rate of 10% per year, excluding exploration expenditure.

In the wake of Q122 results, our valuation of the dividend stream potentially available to Alkane shareholders from its immediate Tomingley operations is now A$0.328/share (cf A$0.348/share previously – albeit with the decline solely attributable to the strengthening in the relevant forex rate, from A$1.3771/US$ to A$1.3497/US$). However, to this must be added the value of residual resources at the end of the life of operations, which we estimate to be 0.8Moz with a current value of US$18.2m (A$24.5m), or A$0.041/share, to bring our total valuation of Tomingley to A$0.369/share including cash.

A comparison of our updated and prior expectations for Alkane’s EPS and DPS stream and valuation from the present to the end of its life of operations is as follows:

Note that the DPS columns in Exhibit 12 represent theoretical, maximum potential dividends that we believe could be paid by the company, rather than actual dividends forecast and are used solely for valuation purposes. In reality, we would expect a portion of any dividends that could be paid instead to be re-invested into the business, either in the form of exploration expenditure (eg at the Northern Molong Porphyry Project) or capital expenditure.

A summary of our updated valuation of Alkane in the light of both our updated Boda estimates (see Exhibits 4, 6 and 8) and Q122 results (see Exhibit 11) is as follows:

Alkane reported A$34.4m in cash on its balance as at end-September 2021, partially balanced by an assumed A$24.9m in net debt financing from its Macquarie working capital facility plus lease financing during the quarter, to result in an overall estimated net cash position of A$9.5m at the quarter’s end (cf A$9.8m as at end-FY21). In addition, Alkane had A$4.9m of bullion on hand and, we estimate, an updated A$87.8m in listed investments in Calidus and Genesis (cf A$51.1m previously). Excluding cash flows from financing activities, Alkane generated A$71.1m in cash from operating activities in FY21. Hereafter, we estimate that cash flow from operations will contribute meaningfully to capex as the Tomingley mine extension is constructed. However, we expect management will nevertheless seek to fund a portion of the project with debt put in place over the next 12 months.