Alkane Resources — Forecast and valuation upgraded

Alkane Resources (ASX: ALK)

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Research: Metals & Mining

Alkane Resources — Forecast and valuation upgraded

Q319 was a strong quarter for Alkane Resources, with gold production from the stockpile at Tomingley Gold Mine above expectations. As a result, we have increased forecast gold production for FY19 to 44,000oz from 40,000oz and increased gold sold to 48,800oz from 41,500oz. We have also decreased our forecast all-in sustaining cost to A$1,059/oz Au from A$1,108/oz Au.

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Written by

Metals & Mining

Alkane Resources

Forecast and valuation upgraded

Q319 results

Metals & mining

2 May 2019

Price

A$0.24

Market cap

A$119m

Net cash (A$m) at 31 March 2019

72.4

Shares in issue

506.1m

Free float

78%

Code

ALKX

Primary exchange

ASX

Secondary exchange

OTCQX

Share price performance

%

1m

3m

12m

Abs

(17.5)

9.3

(16.1)

Rel (local)

(19.7)

0.3

(20.8)

52-week high/low

A$0.31

A$0.19

Business description

Alkane Resources an Australian production and development company. It previously produced 70,000oz of gold per year from the open pit operations at its Tomingley gold mine, but is now transitioning to underground operations and expects to produce around 32,000oz of gold pa.

Next events

Q419 results

25 July 2019

FY19 results

25 October 2019

Q120 results

30 October 2019

Q220 Results

30 January 2020

Analyst

Dr Ryan D Long

+44 (0)20 3077 5700

Alkane Resources is a research client of Edison Investment Research Limited

Q319 was a strong quarter for Alkane Resources, with gold production from the stockpile at Tomingley Gold Mine above expectations. As a result, we have increased forecast gold production for FY19 to 44,000oz from 40,000oz and increased gold sold to 48,800oz from 41,500oz. We have also decreased our forecast all-in sustaining cost to A$1,059/oz Au from A$1,108/oz Au.

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

06/17

117.8

6.6

0.02

0.00

12.0

N/A

06/18

130.0

31.5

0.05

0.00

4.8

N/A

06/19e

85.1

23.5

0.03

0.00

8.0

N/A

06/20e

57.3

10.6

(0.00)

0.00

N/A

N/A

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

Higher-grade stockpile leads to forecast upgrade

As part of Alkane’s transition from open pit mining to underground mining, it is treating the mid-grade stockpile at Tomingley before transitioning to the low-grade stockpile for the rest of the financial year. During Q319, 10,669oz of gold were produced, with 10,791oz sold, at an all-in sustaining cost (AISC) of A$956/oz. The higher than expected level of production led management to increase guidance to 42,000–47,000oz for the financial year from 35,000–40,000oz (announced on 30 January 2019). Management also advised it has decreased guidance for AISC to A$950–1,100/oz from A$1,050–1,150/oz.

Improved metrics result in EBITDA forecast upgrade

Our revenue forecast for FY19 has increased to A$85.1m from A$73.9m, with our cost of sales forecast increasing to A$45.7m from A$43.7m. As a result, our EBITDA forecast increases to A$29.9m from A$20.7m and PBT increases to A$23.5m from A$14.3m.

Increased stake in Calidus Resources

Alkane Resources has invested an additional A$2.16m in ASX-listed gold junior, Calidus Resources, increasing its holding in the company to 15.2% from 10.19%. Calidus is currently completing a pre-feasibility study (PFS) at its 1.25Moz Warrawoona Gold Project, located in the Pilbara Region of Western Australia.

Valuation: Increased on Tomingley improvements

Alkane’s increased interest in Calidus Resources and updates to the potential cash flow from the Tomingley Gold Mine increase our valuation of these components to A$0.30/share from A$0.27/share. Assuming Alkane secures development funding for Dubbo and the prices of metals improve to the level it expects over the next three years, our valuation could increase to A$0.47/share from A$0.44/share.

Strong Q319 leads to FY19 forecast upgrade

Q319 was stronger than anticipated for Alkane Resources, due to the mid-grade stockpile being higher-grade than expected. As a result we have upgraded our forecast for the year compared to our previous update note and our initiation note.

Financials

Year-on-year comparison (nine months)

Revenue for 9M18 totalled $72.2m, down 24.5% from A$95.6m in 9M18, despite a 3.1% increase in the realised gold price to A$1,749/oz in 9M19 from A$1,696/oz. The decline in revenue was driven by the move to underground mining, which reduced gold production by 37.0% to 37,414oz in 9M19 compared to 59,398oz in 9M18, with gold sales reduced by 26.7% to 41,288oz in 9M19 compared to 56,344oz in 9M18. AISC declined 0.6% during 9M19 to A$991/oz Au from A$997/oz Au in 9M18. Net cash increased to A$72.4m at the end of Q319, up 19.5% from A$60.6m at the end of Q318.

Quarter-on-quarter comparison

Q3 revenue totalled $19.9m, down 51.3% from A$40.9m in Q219, despite a 7.3% increase in the realised gold price to A$1,841/oz from A$1,716/oz. The substantial reduction in quarter-on-quarter revenue was driven by the reduction in gold inventory in Q219. Gold production was slightly down, by 4.0% to 10,669oz during Q319, from 11,111oz in Q219, while gold sales were 54.7% down to 10,791oz in Q319 from 23,841oz in Q219. AISC declined 9.0% during Q319 to A$956/oz Au from A$1,051/oz Au in Q219. Net cash decreased 1.7% to A$72.4m in Q319 from A$73.7m in Q219.

Changes to our forecasts

Operational changes: gold production forecasts for FY19 increase to 44,000oz of gold from 40,000oz. Forecast gold sales increase to 48,800oz Au from our prior 41,500oz Au. Forecast AISC has been reduced to A$1,059/oz Au from A$1,108/oz Au.

Income statement changes: revenue for FY19 increases to A$85.1m from A$73.9m, with cost of sales increasing to A$45.7m from A$43.7m. As a result, EBITDA increases to A$29.9m from A$20.7m and PBT to A$23.5m from A$14.3m.

Cash flow statement changes: our estimated operating cash flow for FY19 has increased to A$26.4m from A$19.9m, with cash used in investing activities increasing to A$30.2m from A$25.4m, largely due to increased forecast exploration expense for FY19 to A$12.8m from A$10m and the increased investment in Calidus to A$6.5m from A$4.3m. As a result, we estimate net cash at end FY19 of A$68.3m (previouslyA$66.5m), down c 5% from A$72.0m at end FY18.

Valuation

The total effect of all the updates to our forecasts is an increase in our valuation of the Tomingley Gold Mine to A$0.30/share, with our valuation of Alkane’s 15.2% holding in Calidus Resources largely unchanged at A$0.012/share, from A$0.008/share. Our valuation of the Dubbo Project has not changed and, assuming Alkane secures initial development funding for Dubbo in Q419 (financial year) and the prices of metals improve to the level the company expects over the next three years, our valuation could increase to A$0.47/share, previously A$0.44/share.

Exhibit 1: 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

85,130.1

57,266.8

75,445.5

174,103.7

Cost of Sales

(57,073.0)

(51,304.0)

(45,724.0)

(26,549.7)

(36,469.9)

(104,172.4)

Gross Profit

60,719.0

78,670.0

39,406.1

30,717.0

38,975.6

69,931.3

EBITDA

 

 

49,333.0

68,578.0

29,906.1

21,027.0

29,091.8

59,849.8

Normalised operating profit

 

 

7,607.0

32,107.0

22,652.9

13,651.8

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

22,652.9

13,651.8

0.0

0.0

Net Interest

(1,035.0)

(603.0)

819.2

(3,021.0)

(25,190.1)

(32,841.1)

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

0.0

33,356.6

0.0

Profit before tax (norm)

 

 

6,572.0

31,504.0

23,472.1

10,630.7

(25,190.1)

(32,841.1)

Profit before tax (reported)

 

 

(33,568.0)

31,316.0

23,472.1

10,630.7

8,166.5

(32,841.1)

Reported tax

4,631.0

(6,845.0)

(5,993.0)

(10,996.8)

0.0

0.0

Profit after tax (norm)

11,203.0

24,659.0

17,479.1

(366.1)

(25,190.1)

(32,841.1)

Profit after tax (reported)

(28,937.0)

24,471.0

17,479.1

10,630.7

8,166.5

(32,841.1)

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

17,479.1

(366.1)

(25,190.1)

(32,841.1)

Net income (reported)

(28,937.0)

24,471.0

17,479.1

10,630.7

8,166.5

(32,841.1)

Basic average number of shares outstanding (m)

503

506

506

524

733

1,135

EPS – basic normalised ($)

 

 

0.02

0.05

0.03

(0.00)

(0.03)

(0.03)

EPS – diluted normalised ($)

 

 

0.02

0.05

0.03

(0.00)

(0.03)

(0.03)

EPS – basic reported ($)

 

 

(0.06)

0.05

0.03

0.02

0.01

(0.03)

Dividend ($)

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

10.3

(-34.5)

(-32.7)

31.7

130.8

Gross margin (%)

51.5

60.5

46.3

53.6

51.7

40.2

EBITDA margin (%)

41.9

52.8

35.1

36.7

38.6

34.4

Normalised operating margin (%)

6.5

24.7

26.6

23.8

0.0

0.0

BALANCE SHEET

Fixed assets

 

 

148,474.0

138,275.0

160,684.1

344,778.9

736,464.5

904,496.5

Intangible assets

83,107.0

93,136.0

105,917.0

100,289.8

110,289.8

120,289.8

Tangible assets

60,627.0

36,266.0

39,376.3

229,098.3

610,783.9

768,815.9

Investments & other

4,740.0

8,873.0

15,390.8

15,390.8

15,390.8

15,390.8

Current assets

 

 

54,276.0

93,306.0

83,024.0

12,313.2

18,314.0

24,196.8

Stocks

9,644.0

19,153.0

12,895.0

2,196.5

2,893.8

6,677.9

Debtors

2,445.0

2,030.0

1,864.0

4,706.9

6,201.0

14,309.9

Cash & cash equivalents

41,969.0

72,003.0

68,265.0

4,789.8

8,099.2

1,588.9

Other

218.0

120.0

0.0

620.0

1,120.0

1,620.0

Current liabilities

 

 

(19,335.0)

(27,430.0)

(21,583.0)

(17,025.3)

(34,586.6)

(47,802.2)

Creditors

(11,166.0)

(9,299.0)

(8,255.0)

(2,182.2)

(2,997.5)

(8,562.1)

Tax and social security

0.0

(6,929.0)

(6,929.0)

(5,423.1)

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)

(6,399.0)

(9,420.0)

(31,589.1)

(39,240.1)

Long-term liabilities

 

 

18,488.0

13,647.0

17,215.0

(17,785.0)

(242,785.0)

(312,785.0)

Long-term borrowings

0.0

0.0

0.0

(35,000.0)

(260,000.0)

(330,000.0)

Other long-term liabilities

18,488.0

13,647.0

17,215.0

17,215.0

17,215.0

17,215.0

Net assets

 

 

201,903.0

217,798.0

239,340.1

322,281.8

477,406.9

568,106.0

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

201,903.0

217,798.0

239,340.1

322,281.8

477,406.9

568,106.0

CASH FLOW

Operating cash flow before WC and tax

49,333.0

68,578.0

29,906.1

21,027.0

29,091.8

59,849.8

Working capital

5,518.0

(9,498.0)

577.0

1,782.8

(1,376.1)

(6,328.4)

Exceptional & other

672.0

2,823.0

706.0

500.0

500.0

500.0

Tax

0.0

(6,845.0)

(5,993.0)

(12,502.7)

(5,423.1)

0.0

Net operating cash flow

 

 

55,523.0

55,058.0

25,196.1

10,807.1

22,792.7

54,021.4

Capex

(33,551.0)

(9,224.0)

(10,363.5)

(197,597.3)

(411,277.4)

(218,381.8)

Acquisitions/disposals

53.0

0.0

0.0

54,540.0

0.0

0.0

Net interest

(1,035.0)

(603.0)

819.2

0.0

(3,021.0)

(25,190.1)

Equity financing

3,471.0

(5.0)

0.0

10,000.0

100,000.0

80,000.0

Exploration and Evaluation

(10,154.0)

(10,969.0)

(12,781.0)

(13,000.0)

(10,000.0)

(10,000.0)

Other

2,963.0

(4,317.0)

(7,017.8)

36,775.0

79,815.2

43,040.2

Net cash flow

17,270.0

29,940.0

(4,147.0)

(98,475.2)

(221,690.6)

(76,510.3)

Opening net debt/(cash)

 

 

(24,455.0)

(41,969.0)

(72,003.0)

(68,265.0)

30,210.2

251,900.8

FX

0.0

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

244.0

94.0

409.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(41,969.0)

(72,003.0)

(68,265.0)

30,210.2

251,900.8

328,411.1

Source: Company accounts, Edison Investment Research

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This report has been commissioned by Alkane Resources and prepared and issued by Edison, in consideration of a fee payable by Alkane Resources. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by Alkane Resources and prepared and issued by Edison, in consideration of a fee payable by Alkane Resources. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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Frankfurt +49 (0)69 78 8076 960

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United Kingdom

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Solid State — FY19 slightly ahead of upgraded consensus

Solid State has announced that FY19 profit will be slightly ahead of the £3.5m in consensus estimates, as will revenue at c £56m. This is the result of continued strong demand in the Value Added Distribution division and the anticipated H2 recovery in the Manufacturing division materialising. Consensus FY19 and FY20 estimates are unchanged following the January upgrade, supported by an order book at end March 2019 that was 40% higher than a year previously. While the share price has responded positively to the news, the shares continue to trade at a substantial discount to peers with regards to prospective P/E.

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