Alkane Resources — Cashed up and hungry for investments

Alkane Resources is a gold production company with a strong balance sheet and a management team with extensive experienced in successful exploration and mine development.

Over the past 12 months, Alkane’s share price has declined from A$0.32/share to A$0.20/share. We believe this has been driven by the anticipated decline in gold production as Tomingley moves from open pit to treating the mid-grade stockpile and then underground operations, combined with weakening sentiment towards the sector against a backdrop of anticipated economic slowdown in China. The potential catalysts for the company over the next 12 months are evidence of successful completion of the transition to underground mining at Tomingley (H219), exploration success extending the life of mine at Tomingley, additional investments in the gold junior space and securing the development finance for Dubbo stage 1.

The development of an underground mining operation is fraught with risk: poor ground conditions, water ingress, dilution and grade reconciliation can all affect the capital cost, operation cost, production levels and development time frame for the mine.

The timing of funding required for the development of the Dubbo project is the major hurdle that Alkane currently faces and the biggest threat to the company meeting our forecasts. We have assumed the funding is secured early in FY20 as a scenario to demonstrate the potential value of the company. In reality, market conditions will dictate the pace of the development funding timetable, which is considered to be fairly fluid at present.

In H1 FY19, gold production totalled 26,745oz at an all-in sustaining cost (AISC) of A$1,005/oz Au, while gold sales totalled 30,497oz Au, generating revenue of A$52.4m at an average sales price of A$1,717/oz Au. At the end of Q2 FY19, the company had a net cash position of A$73.7m.

In FY19, we forecast that Alkane will produce 40,000oz Au, down 49% y-o-y from 78,533oz Au in FY18 due to reduced throughput as a result of transitioning to underground operations. We forecast an AISC of c A$1,150/oz Au, up 15%y-o-y, compared with an AISC of A$1,002/oz Au in FY18. In FY19 we forecast gold sales of 41,500oz, down 45% y-o-y from 75,507oz in FY18, generating revenue of A$73.9m, down 43% y-o-y from A$130m in FY18 with EBITDA of A$21.2m, down 69% from A$68.6m in FY18. Our forecast average sales price per ounce of gold is A$1,756/oz Au, up 3% from A$1,706/oz Au in FY18.The reduction in gold production, revenue and EBITDA is driven by transitioning from open pit to underground operations.

Alkane Resources was known as Alkane Exploration before 2007 and has been listed on the ASX since 1969. At the time of the IPO, it was exploring for gas in the Sydney Basin, but moved into gold exploration in the late 1970s. Alkane has been producing gold from the area around the town of Dubbo since 1996.

Alkane has also been actively exploring the area around the town of Dubbo for other metals and minerals, and in 1998 commenced initial metallurgical evaluation of the Dubbo zirconium-rare earth element-niobium-hafnium (polymetallic) project. Since then it has advanced the project to definitive feasibility study (DFS) stage.

Alkane owns 100% of both the Tomingley and Dubbo projects, both of which are in New South Wales (NSW), Australia (Exhibit 1).

The company has commenced the underground development of Tomingley in early 2019, with the first extraction of ore from underground to occur in mid-2019 and processing of the underground ore in Q419.

Alongside the Tomingley underground development, Alkane is assessing the potential to go underground at its former open pit mine, Peak Hill, while continuing its regional exploration programme in the wider Tomingley area. It is also seeking the funding required to develop the Dubbo project into a large polymetallic mine.

The Tomingley gold project is composed of seven exploration licences covering an area of c 440km2 (Exhibit 2). The project contains the four open pits that make up the current Tomingley operation, which has an associated 1Mtpa processing facility. The project contains numerous prospects that have already been demonstrated to contain gold, including the former Peak Hill Gold Mine (153,000oz Au mined in 1996–2005) and the Myalls United Mine (70,000oz Au up to 1917).

The Tomingley project has a total JORC 2012-compliant mineral reserve estimate of 124,200oz Au at a grade of 1.8g/t Au, the bulk of which would be accessible from an underground operation, with a significant contribution from the mid-grade stockpile (Exhibit 3). The project has a JORC 2012-compliant mineral resource estimate of 437,000oz Au at a grade of 1.8g/t Au, the majority of which is considered open-pittable but has strip-ratio and physical limitations of the near-by highway that limits the economically extraction (Exhibit 3).

Geology

The Tomingley gold project contains Ordovician volcanic, intrusive and sedimentary rocks that have been complexly folded and faulted. Orogenic gold mineralisation at the Tomingley project is hosted in porphyritic andesites and monzodiorites along the contact with volcaniclastic meta-sedimentary rocks.

Alkane believes the Peak Hill deposit, which it formerly open-pit mined between 1996 and 2005 and it is now examining for its underground potential, is a high sulphidation epithermal deposit that has been highly deformed and hydrothermally altered. The host rocks are Ordovician volcaniclastic and are similar to the sequence at Tomingley.

Alkane has now completed open-pit operations at Tomingley. The company in focusing on treating the mid-grade surface stockpile. Processing of the stockpile is then expected to continue until April 2019.

At present the company expects to recover c 93,000oz Au from the underground development of the Wyoming One orebody (Exhibit 4) at the Tomingley project over 40 months, which equates to c 28,000oz Au pa. Mineralisation remains open under the existing three open pits, which could extend the life of the underground operation beyond this initial period. With that in mind, Alkane is planning to rapidly establish underground drill positions to target along strike and down dip extensions. The company estimates the cash cost of the underground operation to be between A$1,100/oz and A$1,200/oz.

At the Peak Hill deposit, a JORC 2012-compliant inferred mineral resource estimate has been established for 108,000oz Au at a grade of 3.29g/t Au and 0.15% copper (Cu) (Exhibit 5). The deposit remains open at depth and has the potential for deeper mineralisation in the satellite deposits. Alkane is continuing to re-evaluate the potential for an underground operation at Peak Hill.

Alkane has purchased and is refurbishing most of the major equipment that is required for the underground operation at Tomingley. It has also completed the recruitment of experienced underground operators.

The ground support for the portal started installation in late 2018, with underground development now underway. The extraction of first ore is expected in mid-2019. This ore will be stockpiled at the surface, with processing of the ore expected in Q419. Alkane estimates the total capex requirement until first underground ore is recovered to be A$25m, which is likely to be funded from internal cash resources.

Alkane’s regional exploration efforts are focused on defining minable ounces to the south of Tomingley (Roswell, San Antonio and El Paso prospects) and it is assessing the potential to go underground at its former open pit operation at Peak Hill (Exhibit 6). Additional ounces in both areas could be used to extend the life of operations at Tomingley.

Mineralisation at the Roswell prospect has been defined over a north-south strike of 350m and remains open to the north and south. Recent drilling at Roswell returned 39m at a grade of 4.49g/t Au from 123m, 21m at a grade of 2.46g/t Au from 207m and 26m at 2.48g/t Au from 234m (RWRC023), 16m at a grade of 1.90g/t Au from 76m (RWRC003) (Exhibit 7); 11.55m at a grade of 2.15g/t Au from 323.45m and 7.65m at a grade of 2.5g/t Au from 340.6m (RWD001). A follow up RC drill programme towards the south of Roswell is underway.

Air core drilling at the San Antonio prospect returned results including 3m at a grade of 1.81g/t Au from 57m (RWAC058) and 15m at a grade of 1.29g/t Au from 57m (RWAC101). This drilling was focused on highly weathered rocks and several of the holes terminated in mineralisation or early in quartz reefs. Follow-up reverse circulation drill programme is underway at San Antonio (5,000m) and El Paso prospects (2,500m). These prospects cover a strike length of 2,500m.

At the Peak Hill deposit, a diamond drill programme is currently underway to provide confirmation of the geology and structures that appear to control the higher-grade ore shoots in the deposit (Exhibit 6), as well as fresh material for metallurgical testing.

Alkane Resources is seeking to leverage its impressive cash position of A$73.7m (as at 31 December 2018) by acquiring interests in junior gold companies and gold projects, which it considers have high exploration potential and/or require near-term development funding.

Alkane believes this strategy will allow it to continue generating revenue from gold production, even after mining has ceased at Tomingley. Alkane’s first successful acquisition was 144.6m shares in Calidus Resources through a placing and on-market purchases with an average acquisition price of A$0.0295/share. Calidus’s current share price is A$0.028/share.

Alkane also attempted to acquire an interest in Explaurum but was unsuccessful following Ramelius Resources’ increased bid for the company. Alkane was reimbursed its cash advance of A$0.8m and received a break fee of A$0.4m.

Alkane holds 144.6m shares and 70m options exercisable at A$0.035 in Calidus Resources. This is around 10.19% of Calidus on an undiluted basis. Alkane acquired its interest in Calidus at what we believe is an attractive average price of US$2.4/oz Au resource (A$3.4/oz Au), which compares to the average in-situ value of ASX-listed gold explorers of US$24/oz Au and a global average of US$16/oz Au (source: Gold stars and black holes, January 2019).

Calidus is an exploration company that has defined an initial JORC 2012-compliant mineral resource estimate of 1,248,000oz of gold at a grade of 1.83g/t Au at its Warrawoona Gold Project, located in the East Pilbara of Western Australia.

The company has made numerous discoveries of gold mineralisation along strike of its current mineral resource estimate and we believe it has the potential to prove up a significant project with further exploration. Calidus is continuing to explore alongside undertaking an initial feasibility study at the project.

The Dubbo zirconium-rare earth element-niobium-hafnium project is composed of one mining lease (1724), which covers an area of 3,456ha (Exhibit 8), within a larger exploration licence, and is focused on the Toongi deposit. The mining lease was awarded in December 2015 and is valid for an additional 21 years, and can be renewed, which should cover the project’s initial 20-year mine life. The project has all the material state and federal approvals, permits and licences in place and is construction-ready, once the finance required to move the project into production is secured.

Two DFSs have been completed for the project (announced in 2011 and 2013). Since then, the company has completed a number of optimisation studies and engineering reviews to improve project metrics and potential returns, culminating in the Dubbo Project: Engineering & Financials Update (announced on 4 June 2018). This study defined a pre-tax NPV8 of A$909m and a pre-tax IRR of 16.1%.

Our valuation of the Dubbo Project is based on the results of this study, which defines a two-stage development programme for the project. Stage 1 will be a 500ktpa operation due to start construction once funding is secured, which in our model we assume is secured early in FY20, as a scenario to demonstrate the potential value of the company. In reality, market conditions will dictate the pace of the development funding timetable, which is considered to be fairly fluid at present.

Following stage 1, an expansion to 1Mtpa is planned for stage 2. The two-stage development allows Alkane to build the project in a more investor-friendly way. The first stage will de-risk the project and act as a proof of concept, potentially allowing the funding for stage 2 to be secured on more favourable terms. Alkane is also examining the potential for a further expansion to 2Mtpa should demand be high enough and funding available. Once the financing is completed, construction of the project is estimated to take 27 months.

Reserves and resources

The Dubbo Project has a total a total JORC 2012-compliant mineral reserve estimate of 18.9Mt at a grade of 1.85% ZrO2, 0.04% HfO2 and 0.7% TREO (Exhibit 3). It’s JORC 2012-compliant mineral resource estimate is 75.18Mt at a grade of 1.89% ZrO2, 0.04% HfO2 and 0.74% TREO (Exhibit 9), excluding yttrium, including yttrium grade is 0.88%.

Infrastructure

The Dubbo Project site will require a significant amount of ancillary infrastructure despite its proximity to the town of Dubbo, largely because of the massive scale of the project. The project will be able to use existing roads to transport goods to and from site, but the exiting road to the site entrance will need to be upgraded to accommodate the project's traffic.

The water required for construction and development will come from the Macquarie River and the Upper Macquarie River Alluvial Aquifer. Alkane has already obtained the required licences to extract c 2gl annually.

Natural gas is required to heat reagents within the processing plant and Alkane is in discussions with the owner of the gas distribution network in NSW to expand the existing network to the Dubbo Project site. However, as a base case, the company has assumed the required gas is trucked to site in its estimate of operating costs.

Grid-based high-voltage power will be installed at the site through a single-circuit 132kV overhead transmission line and a dual-circuit 132kV overhead transmission line to the Geurie Switching Station, around 25km away.

The Dubbo Project will use a residue storage facility made up of a series of cells that are double lined to prevent leakage. Cells can be filled, closed and rehabilitated independently of each other, providing a high standard of safety and rehabilitation.

The Dubbo Project will also require the construction of two facilities to produce two of the process plant’s main reagent consumables: sulphuric acid and limestone. Sulphuric acid will be produced in an on-site sulphur-burning plant with waste heat from the acid plant used to co-generate electricity. Limestone will initially be purchased externally, while a quarry close to Geurie can be developed.

Geology

The Toongi deposit, on which the Dubbo Project is focused, is one of several alkaline volcanic and intrusive bodies in the area that formed during the Jurassic period. Toongi is an elliptical-shaped lava flow or sub-volcanic intrusion with a strike of 850m east-west and a width of 550m, extending to a depth of around 115m below the surface (Exhibit 10).

The orebody is dominantly fine-grained micro-porphyritic trachyte that is composed of 80% feldspar, with potassium feldspar, albite and aegirine in roughly equal amounts. The minerals of economic interest are fine grained (<100µm) and fairly evenly distributed throughout the host rock. The bulk of the ore metals occur within Na-Ca-Zr-Hf-heavy rare earth elements (HREE) silicate phase minerals (similar to eudialyte). The dominant Nb and Ta mineral is close to natroniobite in composition and bastnasite hosts the light rare earth metals. The deposit also contains low levels of uranium and thorium and is therefore a weakly radioactive ore.

Mining method

Ore will be extracted from a single open pit using conventional drill and blast operations in two c 10-year stages. The initial open pit (stage 1) will have an area of c 20ha and be excavated down to a depth of c 32m; the second stage will widen the pit to an area of 40ha.

Processing method

Alkane has been working on the processing flow sheet for the Dubbo project since 1998. The flow sheet is based on sulphuric acid and water leaching, followed by solvent extraction recovery and refining. A pilot plant has been periodically operational since 2008.

The extracted ore from the open pit first undergoes several stages of crushing and grinding before being mixed with sulphuric acid and roasted to form sulphated solids (Exhibit 11). The sulphated solids are then cooled, mixed with water and leached into a solution. The leach slurry is washed and separated into two liquors. The first contains the majority of the light rare earth elements (LREE), the second contains the zirconium, hafnium, niobium and HREE.

The liquor containing the HREE and other minerals passes through a solvent extraction circuit in several stages. The zirconium-hafnium precipitate is extracted in the first stage; some of this precipitate then passes to a hafnium-removal circuit producing zirconium and hafnium-rich products. The liquor then passes to a crude niobium-tantalum precipitate that is further refined to produce the final ferro-niobium product. The remaining liquor (mainly HREE concentrate) is combined with the LREE concentrates and pumped to a REE separation process, which produces final separated REEs as oxides.

Products

The polymetallic nature of the Toongi deposit combined with the complex processing method means Alkane can produce a variety of products to supply a variety of end users, but the products can broadly be split into four groups. Zirconium accounts for 47% of estimated life of mine (LOM) revenue, REE 33%, ferro-niobium 13% and hafnium oxide 7% (Exhibit 12).

The Dubbo Project contains 14 of the 15 REEs, but neodymium, dysprosium and praseodymium account for 84% of the LOM REE revenue (Exhibit 13).

The 14 products Alkane plans to produce are:

Additional information on the most economically significant minerals to be produced at Dubbo can be found in the Edison Explains section of our website:

Funding

The capex for stage 1 at Dubbo is estimated to be A$808m and A$692m in stage 2, giving a total expenditure of A$1.5bn. This is a large amount for a company with a market cap of A$99m to secure. Alkane plans to raise the funds required through:

Relative scale compared to REE peers

Compared to the deposits held by Alkane’s REE peer group, Dubbo is relatively small and low-grade based on its total rare earth oxide (TREO) content (Exhibit 14). This is because the REE content of the deposit only accounts for 33% of its estimated LOM revenue, with zirconium accounting for 47%, ferro-niobium 13% and hafnium oxide 7% (Exhibit 12). If we compare Dubbo to its REE peer group using the TREO equivalent grade, we can see that Dubbo is not only one of the three highest-grade deposits but also the largest in terms of contained TREO equivalent of the three highest-grade deposits (Exhibit 14).

Management expects the Dubbo Project to have an LOM of 20 years based on the reserve estimate (Exhibit 15). Based on the size of the resource estimate, management believes the project could have an LOM of 75 years, which makes it the largest of its peer group.

Strip ratio compared to REE peers

The Dubbo Project benefits from an exceptionally low strip ratio of 1:0.1 for stage 1 and 1:0.2 for stage 1 and 2 combined compared to its peer group (Exhibit 16), which is a key reason why the project’s opex is in the mid-range of its peer group (Exhibit 19). This is a result of the geometry of the mineralisation combined with a lack of over burden over much of the deposit (Exhibit 10).

REE recovery compared to REE peers

Compared to Alkane’s REE-focused peer group, the Dubbo Project appears to have a relatively low REE recovery rate (Exhibit 17) of 60%. There are two reasons for this, the first is that Alkane plan to produce finished products from Dubbo, while the majority of its peer group are likely to produce intermediate products so the recoveries of the peer group appear higher than Alkane’s. Secondly, because REEs only account for 33% of the LOM revenue of the Dubbo Project, so the recovery circuit is optimised for a higher recovery of zirconia (84.4%), which accounts for 47% of the project’s LOM revenue.

TREO equivalent annual production compared to REE peers

During stage 1, management expects Dubbo to produce an average of 2,603t of TREO pa. This increases to 5,269t of TREO pa with the addition of stage 2. As TREO only accounts for 33% of the LOM revenue, we compared Dubbo to its REE peer group using TREO-equivalent production based on the prices assumed in our model, which averages 8,301tpa for stage 1 and 15,575tpa for stage 1 and 2 combined (Exhibit 18). On this basis, stage 1 is a moderate-scale operation whereas stage 2 is much larger. It is important to note that Alkane plans to produce finished products from Dubbo, while the majority of its peer group are likely to produce intermediate products that will receive a discount to the market price.

Position on cost curve compared to REE peers

Using the Dubbo Project’s opex per TREO equivalent estimate (see above) compared to the opex per TREO of its REE peer group, the Dubbo Project lies within the middle of the cost curve for stage 1 and stage 1 and 2 combined (Exhibit 19).

Position on capital intensity curve compared to REE peers

The Dubbo Project lies within the middle of the capital intensity curve on a capex per TREO-equivalent basis for stage 1 and stage 1 and 2 combined (Exhibit 20).

To value and forecast the production from the Tomingley gold mine, we used Edison’s gold price deck of US$1,263/oz Au for 2019, US$1,482/oz for 2020, US$1,437/oz for 2021 and US$1,304/oz for 2022. We use an exchange rate of US$1.39/A$.

Given the relative complexity and low transparency of the REE market and products used to value the Dubbo Project, we chose to use the average price forecasts defined in its engineering and financials update (announced 4 June 2018). We focused our model using the top eight products the company plans to produce, which account for 94.5% of the LOM revenue. The other six products we include as a factor of the major products. In addition to our base-case model we provide a detailed sensitivity analysis (Exhibit 25 and Exhibit 26), which includes price assumptions.

In the model we used flat commodity prices over the mine’s 20-year life with production starting in 2022. The prices used are US$10,000t for zirconium oxychloride (December 2018 price US$2,450/t); US$90,000/t for neodymium oxide (October 2018 price US$46,960/t); US$21,000 for low hafnium zirconia (October 2018 price US$4,700/t); US$33,350 for ferro-niobium (December 2018 price US$45,000/t); US$21,000t for yttria stabilised zirconia (October 2018 price US$10,000/t); US$325,000/t for dysprosium oxide (October 2018 price US$173,000/t); US$600,000/t for hafnium oxide (December 2018 price US$850,000/t); and US$90,000/t for praseodymium oxide (October 2018 price US$59,000/t).

The majority of the prices used in our forecast are above the current level and reflect the company’s belief in the underlying supply-demand commodity fundamentals. Although we believe the REE fundamentals are supported by developments in the electric vehicle space, the current economic slowdown in China against the backdrop of the US trade tensions may prevent REE prices from appreciating in the near term.

We base our forecasts and valuation of Alkane’s Tomingley project on the Tomingley Underground Development Approved update (announced on 24 September 2018) and on guidance from management. The key operational variables used in our discounted dividend model between 2019 and 2022 are outlined in Exhibit 21.

We base our forecasts and valuation of Alkane’s Dubbo Project on the project’s engineering and financials update (announced 4 June 2018). The key operational variables used in our discounted dividend model between 2020 and 2030 are outlined in Exhibit 22.

At Tomingley we include LOM sustaining capex of US$33m, which is largely associated with the underground mine development. The total development capex for stage 1 production at Dubbo is A$808m. We forecast A$375m will be spent in 2020 and A$433m in 2021. Stage 2 is expected to cost an additional A$692m in capex; we forecast A$346 will spent in 2025 and A$346m in 2026. Over the LOM we include sustaining capex of A$28.6m with closure costs of A$29m.

In our model we present a scenario whereby Alkane secures the funding for the Dubbo Project in the early part of FY20 (July to September 2019). However, it is important to note that the timing of funding for the Dubbo Project will be driven by market conditions and the timeline for funding should be considered to be fairly fluid at this stage.

In our funding assumptions for Dubbo, we have assumed a strategic partner acquires a 20% interest in the project for A$54.5m in FY20. This A$54.5m represents 20% of the project’s NPV of A$909m, as defined in the Dubbo Project’s engineering and financials update, which we discounted by 70% to reflect what a potential partner could pay for an interest in a project at this stage of development.

Based on our assumptions, the strategic partner’s contribution to stage 1 capex is A$161m, which is paid between FY20 and FY22. This would leave Alkane funding the balance of A$647m. We estimate that Alkane will finish FY19 with a net cash position of A$66.4m and generate an average EBITDA pa of A$42m from Tomingley during FY20-22. Some of this will be used to fund ongoing exploration costs and the sustaining capex at Tomingley and other requirements, but the rest can be used toward the development of Dubbo. We have estimated the remaining A$535m is funded through 60% debt (A$325m) and 40% equity (net of fees A$210m, A$221m gross). We assume an interest rate of 10% for the debt and assume the equity (1.1bn shares) is issued at the current share price of A$0.20, although based on discussions with management we note that they would not consider issuing shares at the current share price and would be seeking a higher price for any equity component to the Dubbo Project finance.

Alkane trades on an EV per attributable contained ounce of gold in the resource estimate of US$28/oz (100% interest in Tomingley and 10.2% interest in Calidus), which compares to an average in-situ value of ASX-listed gold explorers of US$24/oz and a global average of US$16/oz (see Gold stars and black holes) but does not take into account the Dubbo Project’s value.

Alkane trades on an EV per attributable tonne of TREO of £21/t for Dubbo not including zirconium, ferro-niobium or hafnium, including these as a TREO equivalent it trades on an EV multiple of £7.5/t. This compares to an average of £205.8/t for its REE peer group, although the range is very broad at £1.4/t to £1,104/t (Exhibit 23). Hastings Technology Metals is perhaps Alkane’s closest peer in terms of jurisdiction, development stage and size of contained TREO; it trades at an EV per attributable tonne of TREO of £256.9/t.

We value Alkane Resources’ projects using discounted dividend analysis and include the current market valuation of its holding in Calidus Resources. We value the Tomingley project at A$0.26/share on a fully diluted basis, including the company’s end-December cash position of A$73.7m. We use a discount rate of 10% and assume cost of debt of 10%. Alkane’s interest in Calidus Resources adds another A$0.01/share.

Assuming Alkane can secure the development funding for Dubbo in H119 and that the prices of zirconium, TREO, ferro-niobium all improve to the level expected by the company over the next three years, our valuation would increase by A$0.17/share to A$0.44/share on a fully diluted basis. This would imply an upside of 121% to the current share price (Exhibit 24).

We stress-tested our valuation of Alkane Resources for variations of ±10% and ±20% for capex, opex, price of shares issued for the purpose of the modelled equity raise, interest rate on debt and metals prices (Exhibit 25 and Exhibit 26). The biggest influences on our valuation of Alkane are metal and mineral prices and the share price used in our assumptions (Exhibit 25 and Exhibit 26). Changes in opex have a moderate impact on our valuation, whereas changes in capex and potential interest rates on debt have a relatively minor effect.

A 20% reduction in metal and mineral prices results in a total valuation of Alkane of A$0.12 per share, which is below its current share price, A$0.20. Downside changes in all the other variables ranged between A$0.29 and A$0.42 per share, well above Alkane’s current share price. Upside changes in all variables ranged between A$0.73 and A$0.43 per share, demonstrating potential improvements to our valuation (Exhibit 25 and Exhibit 26).

In H1 FY19, gold production totalled 26,745oz at an AISC of A$1,005/oz Au, while gold sales totalled 30,497oz Au, generating revenue of A$52.4m at an average sales price of A$1,717/oz Au. At the end of Q2 FY19, the company had a net cash position of A$73.7m.

In FY19, we forecast that Alkane will produce 40,000oz Au, down 49% y-o-y from 78,533oz Au in FY18. We forecast an AISC of c A$1,150/oz Au, up 15%y-o-y, compared with an AISC of A$1,002/oz Au in FY18. In FY19 we forecast gold sales of 41,500oz, down 45% y-o-y from 75,507oz in FY18, generating revenue of A$73.9m, down 43% y-o-y from A$130m in FY18 with EBITDA of A$21.2m, down 69% from A$68.6m in FY18. Our forecast average sales price per ounce of gold is A$1,756/oz Au, up 3% from A$1,706/oz Au in FY18.The reduction in gold production, revenue and EBITDA is driven by transitioning from open pit to underground operations.

Longer-term forecasts

Assuming Alkane secures the required funding early in FY20, we forecast that stage 1 production at Dubbo will start in FY22 and continue to FY26, with the mine producing an average per year of 3,706t of zirconium oxychloride; 402t of neodymium oxide; 1,800t of low hafnium zircon; 857t of ferro-niobium; 1,577t of yttria stabilised zirconia; 53t of dysprosium oxide; 44t of hafnium oxide; and 103t of praseodymium oxide (Exhibit 27).

Stage 2 production at Dubbo will commence in FY27 and continue to FY41, with the mine producing an average per year of: 10,167t of zirconium oxychloride; 914t of neodymium oxide; 3,000t of low hafnium zircon; 1,958t of ferro-niobium; 3,153t of yttria stabilised zirconia; 120t of dysprosium oxide; 50t of hafnium oxide; and 235t of praseodymium oxide (Exhibit 27).

We forecast that Tomingley will generate average revenue of US$45m per year between FY19 and FY22 when the mine is due to close, though exploration success could extend this (Exhibit 28). We forecast that during stage 1 at Dubbo, it will generate an average revenue per year of US$237m. In terms of average revenue per product per year we forecast US$37m from zirconium oxychloride; US$36m from neodymium oxide; US$38m from low-hafnium zircon; US$29m from ferro-niobium; US$33m from yttria stabilised zirconia; US$17m from dysprosium oxide; US$26m from hafnium oxide; and US$9m from praseodymium oxide (Exhibit 28).

During stage 1 at Dubbo, we forecast the mine will generate an average revenue per year of US$492m. In terms of average revenue per product per year we forecast US$102m from zirconium oxychloride; US$82m from neodymium oxide; US$63m from low-hafnium zircon; US$65m from ferro-niobium; US$66m from yttria stabilised zirconia; US$39m from dysprosium oxide; US$30m from hafnium oxide; and US$21m from praseodymium oxide (Exhibit 28).

Between FY19 and FY21, we forecast that Alkane will generate an average EBITDA per year of A$30m while the Tomingley mine is operational (Exhibit 29). This increases during the ramp up of production at Dubbo to A$66m in FY22 and FY23, which is the final year of production from Tomingley. Between FY24 and FY27 we expect Alkane to generate an average EBITDA per year of A$192m during stage 1 production at Dubbo (Exhibit 29). This increases during stage 2 production, between FY27 and FY41, to an average EBITDA per year of A$336m (Exhibit 29).

Alkane had net cash of A$72m at 30 June 2018 and A$73.7m at 30 December 2018. We forecast that the company will have a net cash position of A$66.5m at 30 June 2019.