Alkane Resources — A self-sufficient outlook

Listed on the ASX since 1969, Alkane Resources is a gold production company with a multi-commodity exploration and development portfolio. Having de-merged its Dubbo rare earths project into Australian Strategic Metals in 2020, Alkane’s focus is a multifaceted gold investment strategy at its two major projects, Tomingley (including its Roswell and San Antonio extensions) and the NMPP (Kaiser, Boda, Boda Two and Three), both in New South Wales (NSW). In addition to its owner-operated assets, Alkane has also made a number of strategic investments in junior gold mining companies and high-potential projects, where it is in a position to contribute capital, expertise and operating capability, for mutual benefit; for example, in Calidus Resources (ASX:CAI), which commenced production in May 2022, and Genesis Minerals (ASX: GMD), which is developing the Ulysses gold project in Western Australia.

Our valuation of Alkane continues to be underpinned by Tomingley as it develops the San Antonio and Roswell deposits (SAR) to its immediate south, which we estimate contributes A$0.61/share to the company’s valuation. Liquid assets in the form of Alkane’s holdings in Calidus and Genesis contribute a further A$0.03/share. Boda also remains a significant asset to Alkane. In May 2022, Alkane announced a maiden resource at Boda of 5.2Moz gold, or 10.1Moz gold equivalent (AuE). We estimate that this is worth an immediate US$125.5m (or US$0.21/share or A$0.31/share) to Alkane either as an in-situ resource or as a development project, albeit with the proviso that the project-based valuation will likely increase in the future, both as a result of continued resource increases and upgrades and as a result of Alkane’s de-risking the project by achieving future development milestones and with the passage of time, as previously described in detail in our July 2022 note. Alkane has since increased this resource at the NMPP, by announcing an initial inferred resource estimation at its Kaiser deposit (part of the NMPP) of 2.05Moz Au and 0.48Mt Cu (4.7Moz AuE) contained within 270Mt ore at a grade of 0.54g/t AuE. This would add an additional value to Alkane of US$49.4m (US$0.08/share or A$0.12/share). Finally, we calculate a value for our current resource estimate of 2,744koz at Boda Two and Three of A$0.16/share cf A$0.035/share previously (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).

Quantitatively, the sensitivity of our Boda project valuation to long-term changes in metals prices (±69% for every ±10% change in metals prices) is much greater than the sensitivity of our Tomingley valuation (±24% for every ±10% change in prices). Qualitatively, however, as it is a greenfield project development, as opposed to a brownfield one, it carries a higher level of execution risk.

Alkane had A$70.6m in net cash on its balance sheet at end H123, comprising A$86.1m in cash and A$15.5m in external borrowings. According to its 5 April Tomingley Q3 production update, Alkane had A$92.9m in unaudited cash including A$6.5m of bullion on hand and, we estimate, A$17.8m in listed investments in Calidus, Genesis and Sky Metals. Alkane generated A$43.8m in cash from operating activities in H123 compared to A$86.5m in FY22. During H123, it invested A$25.3m in exploration as it continues to fund its Kaiser and Boda deposits to increase the accuracy of their resource estimates plus a further A$13.4m for property plant and equipment largely relating to its Tomingley extension project. Hereafter, we estimate that free cash flow will remain positive as the Tomingley mine extension is constructed (following the recent project approval) and further exploration is undertaken at the Kaiser-Boda deposits. To de-risk the completion of these company targets, financing has been secured via A$50m of debt funding from Macquarie Bank, in conjunction with 100koz of gold hedging at a weighted average price of A$2,825/oz (US$1,909/oz at the current FX rate of A$1.4971/US$, Bloomberg, 28 March 2023). The terms of this facility are confidential but are merely an amendment to the existing facility agreement that has been in place with Macquarie for several years for the purpose of hedging.

Since our July 2022 outlook note on the company, Alkane has:

This note updates our analysis of the company in respect of all these announcements.

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 (Exhibit 1).

As expected, on 22 February 2023, the NSW minister for planning approved Alkane’s Tomingley Gold Extension Project. This approval permits open-cut mining at the Roswell and San Antonio deposits (including underground mining at the former), resulting in the diversion of a section of the Newell Highway, which is now over 50% complete and reviewed frequently by Transport for NSW. The project extension coincides with recent resource confirmation at the Roswell and San Antonio deposits in May 2022 (as discussed in our note, Coming to fruition). Together, Roswell and San Antonio comprise a 19,867kt resource at an average grade of 1.98g/t, containing 1,264koz gold (as per the current company resource and reserve statement). This adds to existing resources at Tomingley of 5,026kt at an average grade of 2.3g/t containing 377koz gold (see link above).

Commissioned in 2014, the processing plant is to be upgraded from 1.00Mtpa to 1.75Mtpa to account for the increased rate of mining from three gold deposits to five. Underground mining is expected to commence at Roswell before the end of CY23, pending the applications for the Environmental Protection Licence and Mining Lease (which cannot now be refused following the minister’s planning approval for the Tomingley Gold Extension Project) and completion of updated management plans, potentially extending the mine life at Tomingley to 2032. Additionally, on 22 February, Alkane completed a A$50m financing facility with Macquarie Bank to ensure the completion of the Tomingley Gold Extension Project. This facility is an amendment to a pre-existing agreement used for hedging. Although the key terms are confidential, there is an agreement to sell 100koz of gold production across the debt service period (March 2024 to December 2026), at a weighted average price of A$2,825/oz (US$1,909/oz at a current FX rate of A$1.4971/US$, Bloomberg, 28 March 2023), to be used for revenue protection purposes (c 40% of expected production over the period). The first debt drawdown is permitted on approval of the mining lease, expected in mid-2023, with the loan tenor running to 31 December 2026.

The open-cut mining plan envisages three pits, joined at the pit crest on a north-south line, which are expected to be mined from the south (ie the San Antonio end) to the north (the Roswell end) with the Roswell pit being mined in two stages. In deference to environmental considerations, scheduling will require the San Antonio pits to be mined first (with most of the early waste being used to backfill the Coloma One and Caloma Two pits at Tomingley), so that waste from Roswell can be placed into them, leaving Roswell as the final, open void. Among other things, this will create a c 2Mt run-of-mine stockpile at its peak (ie more than one year’s milling capacity).

In the meantime, the NSW Resources Regulator granted approval of the development of an exploration drive (May 2020) from the existing underground Wyoming One operation at Tomingley to the Roswell deposit, which will extend into the upper half of the currently planned stoping area, allowing both upwards and downwards development. Underground mining will be similar to that currently employed at Tomingley, using standard long-hole open stoping. However, to maximise recovery in the higher-grade, wider sections of the Roswell ore body, Alkane also intends to use paste fill from a hired plant using consolidated tailings. In the context of underground mining at Roswell, of note is the fact that c 33% of tonnes (and ounces) mined will be from material currently classified as inferred, based on the operating experience and reconciliations at the existing Tomingley operation. Nevertheless, in mitigation, a substantial grade control programme is planned in advance of stoping commencing.

Under its previous approval, on commissioning in 2014, the Tomingley plant had permission to operate at a throughput rate of 1.5Mtpa of ore, which was requested to allow faster processing of oxide material from the original pits. However, since the start of CY21, it has been running at a rate closer to 1.0Mtpa. As part of the new project approval, Alkane has increased its licence to 1.75Mtpa. The plant modifications required to achieve this enhanced throughput capacity include:

Now approved and once developed, the Tomingley Gold Extension Project will, from FY24, add an additional eight years and c 628koz of gold output to Tomingley’s life-of-mine production profile relative to our prior expectations. Following the project approval, the Roswell underground extension is also expected to add a further 160koz, taking the total to c 788koz with production reaching 100koz per annum in CY25.

Exploration around the Boda-Kaiser area within the NMPP has defined a 3.5km corridor of extensive calc-potassic alteration associated with gold-copper porphyry mineralisation. The corridor trends north from Boda Three to Boda for approximately 1km, where it rotates to the north-west from Boda to Kaiser for a further 2.5km.

On 27 February, Alkane announced an initial inferred mineral resource for its Kaiser deposit, approximately 500m north-west of the Boda deposit. The exploration programme, consisting of c 49,400m of drilling, concluded with an estimate of 270Mt grading at 0.54g/t AuE for 4.7Moz AuE contained (0.48Mt Cu, 2.05Moz Au). At the prevailing copper and gold prices (Bloomberg, 28 March 2023: Cu, US$8,964/t and US$1,960/oz), the value of the contained copper is now roughly 50:50 with the value of contained gold for the Kaiser-Boda resources, with a combined total of 894Mt at 0.52g/t AuE for 14.8Moz AuE (7.26Moz Au, 1.38Mt Cu).

Kaiser's maiden resource estimate of 2.05Moz exceeds the top end of our July 2022 range of estimates of 0.7–1.7Moz for Kaiser by at least 19.9% (albeit our estimate was based on only a portion of the final drill data). It also adds to the existing resource of 5.2Moz (10.1Moz AuE) already delineated at Boda. Our mineral inventory estimate is also compared with the locally comparable resource disclosed by Newcrest for Cadia Ridgeway c 100km to the south (Exhibit 4).

Applying the same US$24.08/oz valuation benchmark to the maiden estimate of Kaiser’s resource would add additional value to Alkane of US$49.4m (US$0.08/share or A$0.12/share). Additional exploration is now underway at Boda and Kaiser, with an updated resource estimate expected at the end of CY23.

After a company review of comparable Australian deposits, a 0.3g/t AuE cut-off grade was agreed for the prospect, using an open-cut mining method owing to the shallow nature of the ore body. The resource remains open along both depth and strike with further infill and extension drilling to be undertaken, with a view to defining the continuity of the mineralisation at depth to improve confidence in the mineral resource. The current estimation used a nominal drill hole grid of 100m × 100m to depths averaging 400m and up to 800m below surface (c 490mRL). It utilised a total of 130 drill holes for a combined 49,398m (average 380m/hole), including an historical assay component captured by Rio Tinto and Newcrest (1995–2002) from 37 drill holes comprising 3,224m of reverse circulation (RC) drilling and 4,169m of diamond core (average 200m/hole).

During the mineral resource exploration programme, two significant reverse faults were located dislocating the main zone of mineralisation at Kaiser. There is potential for further extensions to higher-grade mineralisation on the down thrust at the Kaiser west zone of mineralisation, south-west of the Kaiser Fault, supported by drilling results released on 25 October 2022, such as hole KAI090, which intersected a bornite-chalcopyrite crackle breccia, including 122.4m @ 0.40% Cu, 0.42g/t Au from 576.6m and 28m @ 0.84% Cu, 0.92g/t Au from 646m.

Furthermore, drilling immediately south-west and along strike of the east Kaiser zone has returned promising drill hole results (of note, BOD065: 64m grading 0.43g/t Au, 0.12% Cu from 174m to end of hole).

We have updated our estimated mineralisation of the Boda Two and Three deposits (Exhibit 6). New drilling at Boda Two and Three demonstrates similar grading to Boda, reporting 0.29g/t Au (cf 0.10g/t, previously). This updated estimate has been largely facilitated by the increase in average intercepts of the new holes at 303.8m cf 128.4m previously. A summary of the total assay results of the holes drilled to date at the Boda Two and Three prospects is as follows:

Drill hole results confirm that mineralisation continues for many metres to the south of Boda and possibly much further, with the potential for additional high-grade zones. They also demonstrate an extensive zone of low-grade gold-copper porphyry mineralisation with breccias that zone to higher grades. These breccias are in the process of being targeted. In the meantime, our best estimate of the mineral inventory that may be encompassed by current drilling, based on the drill hole assay data announced so far (and using the same methodology as for Boda), is as follows:

Our updated best estimate of the mineral inventory contained within the Boda Two and Three prospects is 2,744koz Au at an average grade of 0.27g/t (cf 591koz at 0.16g/t previously). However, if intersections in this area ultimately increase to those implied by the deposit’s apparent 1,100m × 500m coincident gold-copper soil and magnetic high footprint with separate conductive IP anomalies, we calculate that a resource several times this size (see column entitled ‘Alkane est. dimensions’, Exhibit 7) may still be possible. Kaiser and Boda are also included as a comparison to highlight the size of the potential resources within the magnetic footprint.

As before, readers are cautioned that such estimates are very far from being JORC code-compliant and experience would suggest they have an accuracy of approximately ±75%. In this context, we calculate a value for our current resource estimate of 2,744koz at Boda Two and Three of A$0.164/share, cf A$0.035/share previously (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 7,900koz (as potentially implied by the dimensions noted in the table above), we calculate a value for Boda Two and Three of A$0.560/share (ie on a par with, or even exceeding, the resource at Boda). See the ‘Combined valuation of Alkane’ section on page 14 for more detail on the valuation range of Boda Two and Three depending on the method of valuation.

The NMPP is 100% owned by Alkane, covers c 115km2 of the northern Molong Volcanic Belt and is around 80km to the north-east of the Tomingley Gold Mine, in Central West NSW (Exhibit 1).

The Kaiser geology and mineralisation style is almost identical to Boda and possibly represents a deeper part of the system thrust over the shallower level Boda deposit. In addition, Alkane’s drill results at Kaiser-Boda have shown both a similar stratigraphic sequence and style of alteration and mineralisation to Newcrest’s Cadia Province mines 110km to the south. Nevertheless, the Cadia Province mines host a JORC-compliant mineral resource estimate of 37.7Moz Au at a grade of 0.35g/t Au and 8.4Mt of copper at a grade of 0.26% Cu plus silver and molybdenum, and produced 561koz of gold in FY22 for Newcrest at an AISC of minus US$124/oz Au (net of by-product credits) to generate US$1,744m in revenue, US$1,229m in EBITDA, US$1,296m in operating cash flow and US$613m in free cash flow.

The NMPP 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 8) and all close to road, rail, gas and water infrastructure. Significantly, 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 reported along the western margin of both the Kaiser Intrusive Complex and the Boda Intrusive Complex. 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.

As such, the Kaiser porphyry system manifests in a series of near-vertical, north-west striking, intrusive related breccias hosted within a thick sequence of andesite lavas. Magmatic-hydrothermal breccias appear to be the focus for the calc-potassic alteration and gold-copper mineralisation at Kaiser, where the highest gold and copper grades are related to the transition from intrusive breccias to hydrothermal breccias. The majority of brecciation is found as ‘crackle breccia’, which can either have a hydrothermal matrix typically composed of calcite + actinolite + pyrite + magnetite + chalcopyrite + bornite or an igneous matrix. Copper mineralisation is also observed throughout the prospect outside the magmatic hydrothermal breccias within calcite + quartz + epidote dominant veins and as disseminations and patches, often intergrown with epidote. Locally, copper has been identified along the Kaiser Fault zone in thicknesses up to 10m wide. As shown in Exhibit 5, two significant reverse faults bound and dislocate the main zone of mineralisation at Kaiser, where the west dipping solar fault thrusts the Kaiser main zone over the Kaiser east zone. Located immediately north-west of Boda, the east Kaiser zone comprises potassic to inner propylitic alteration with up to 10% pyrite by volume, which can be found to hold gold grades over tens of metres and can average from 0.2g/t to 0.3g/t in grade with occasional thin intervals of >10g/t Au.

Since our last outlook note, Alkane has announced operational results and financial results for H123, including Q323 production figures. Additionally, on 5 January 2023, Alkane upgraded its FY23 guidance for gold production from 55,000–60,000oz to 62,000–70,000oz at an AISC of A$1,550–1,800/oz, down from previous guidance of A$1,650–1,900/oz. This follows strong production at Tomingley of 37,790oz in H123 and Q323 production of 16,641oz, totalling a combined 54,431oz year to date. Management stated on 5 April that full year production will be at the upper end of its full year guidance. However, given that Alkane’s production has been tracking to outperform guidance (as shown in Exhibit 9, below) we estimate a lower level of production in H223, staying in line with the updated overall FY23 gold production and AISC guidance. A summary of Alkane’s quarterly results to date for FY23 (including our estimates for Q323 and Q423) is as follows:

As a result of Alkane’s operational results to date and its H123 financial results, we have adjusted our FY23 financial forecasts to those shown below in Exhibit 10.

In its interim report, Alkane sold 4.6m shares (December 2022) in Genesis for sale proceeds of A$5.9m, and retained roughly 7m shares. In August 2022, it bought c 4.5m shares in Calidus at a cost of A$3.0m. Together with its holding in Sky Metals, we estimate the value of Alkane’s listed holdings, as at the time of this note, to be as follows:

As in previous reports, 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 (albeit now extended), discounted back to present value at a rate of 10% per year, excluding exploration expenditure.

In the wake of the H123 financial results, our valuation of the dividend stream potentially available to Alkane shareholders from its immediate Tomingley operations has risen 10.8% to A$0.563/share (cf A$0.508/share in July 2022 previously). However, to this must also be added the value of residual resources at the end of the life of operations, which we now estimate to be 834koz (cf 1.0Moz previously) with a current value of US$20.1m (A$29.9m), or A$0.050/share, to bring our total valuation of Tomingley to A$0.613/share (cf A$0.567share previously) including cash.

A comparison of our updated expectations for Alkane’s EPS and DPS stream and valuation from the present to the end of its life of operations is shown in Exhibit 12, below.

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, and given the likely capital requirements of the NMPP, we would expect the majority of any cash flows that could be used for dividends to instead be reinvested into the business, either in the form of exploration or capital expenditure.

A summary of our updated valuation of Alkane in the light of both the announcement of an inferred resource estimation at Kaiser and H123, Q123 and Q223 financial and operating results (see Exhibits 9 and 10) is as follows:

A number of features of the valuation are noteworthy:

Alkane had A$70.6m in net cash on its balance sheet at end H123, comprising A$86.1m in cash and A$15.5m in external borrowings. According to its 5 April Tomingley Q3 production update, Alkane had A$92.9m in unaudited cash including A$6.5m of bullion on hand and, we estimate, A$17.8m in listed investments in Calidus, Genesis and Sky Metals. Excluding cash flows from financing activities, Alkane generated A$43.8m in cash from operating activities in H123 compared to A$86.5m in FY22. During H123 Alkane invested A$25.3m in exploration as it continues to fund its Kaiser and Boda deposits to increase the size accuracy of their resource estimates plus a further A$13.4m for property plant and equipment largely relating to its Tomingley extension project. Additionally, the company generated A$49.4m throughout FY22 from liquidating a portion of its assets in Genesis (c 27m of its shares sold over Q2/Q322). Hereafter, we estimate that free cash flow from operations will continue to contribute meaningfully to capex as the Tomingley mine extension is constructed (following the recent project approval) and further exploration at the Kaiser-Boda deposits. To de-risk the completion of these targets, Alkane has secured financing via A$50m of debt funding from Macquarie Bank, together with 100koz of gold hedging at a weighted average price of A$2,825/oz (US$1,909/oz). Based on our current estimates, it seems unlikely that the company will require the debt facility at gold price forecasts throughout the period (see further information below).

On 22 February 2023, Alkane announced that it had secured a A$50m financing facility with Macquarie Bank, which is expected to fund the Tomingley Gold Extension Project. This facility is an amendment to a pre-existing agreement used for hedging. Although the key terms are confidential, management has stated that there is an agreement to sell 100koz of gold production across the debt service period (March 2024 to December 2026), at a weighted average price of A$2,825/oz (US$1,909/oz at a current FX rate of A$1.4971/US$: Bloomberg, 28 March 2023), to be used for revenue protection purposes (c 40% of expected production over the period). The first debt drawdown is permitted on approval of the mining lease, expected in mid-2023, with the loan tenor running to 31 December 2026. The terms of this facility are confidential but are merely an amendment to the existing facility agreement that has been in place with Macquarie for several years for the purpose of hedging.

Regarding our forecasts, we have continued to model hedges on a realised gains basis, such that any gains/(losses) will be intrinsically linked to the ever-moving gold price along with our current long-term forecast as opposed to a time value. In line with previously modelled debt structures, we report any profit or loss pertaining to hedges in the revenue line of the financial summary below.