Alkane Resources: cash flows beckon in early 2014
The growth cycle of Alkane Resources (ASX: ALK) has begun, with the company on track to pour its first gold in early 2014 from the Tomingley Gold Mine in the Central West region of New South Wales.
Tomingley is part of a multi-commodity development strategy, which includes the world-class Dubbo zirconia project.
It is no small company anymore with a market cap of $140 million, and 6,100 shareholders (85% Australian).
Tomingley received approval by the NSW Department of Planning and Infrastructure in late July 2012, with the mining lease approved in February 2013.
Tomingley will be profitable in the current gold price climate with C3 Cash operating costs around $1,000/oz, with EBITDA -$170 million (at a spot of $1,450/oz). CAPEX is A$107 million.
The project currently hosts a resource of 12.6 million tonnes at 2.0g/t (812,000oz), with production based on throughput of 1.0Mtpa at a head grade of 2.00g/t, with recoveries of 93%.
Gold Production is around 400,000oz over the base case life, with a life of 7.5 years, with Alkane targeting greater than ten years.
Adding to the additional resource potential was a drill intercept of: 9 metres at 110g/t gold.
The mining method will be open cut and underground, with commissioning anticipated for early 2014.
Dubbo zirconia project
Alkane also continues to advance the world-class Dubbo zirconia project (DZP), with feasibility completed. Environmental assessment and financing is in progress.
DZP is a very large polymetallic resource of the metals zirconium (hafnium), niobium (tantalum), yttrium and rare earths, and contains an important strategic metal mix, including 25% heavy rare earth.
The project has an open pit life of at least 70 years, with a demonstrated flow sheet with pilot plant and products for market evaluation, and importantly there is strong market interest in its products.
Annual operation costs at 1Mtpa steady state are around A$214 million.
While the polymetallic deposit and integrated flow sheet makes it difficult to assign costs to specific products, total output cost would be around US$8.80/kg.
On a proportional revenue basis, this breaks down to: zirconium US$ 3.90/kg; niobium US$16.20/kg; LREE US$11.45/kg; and HREE US$68.66/kg.
Alkane's pathway to market for the DZP zirconium includes:
- Leading chemical company to develop applications and markets in Asia for zirconia produced by DZP;
- European manufacturer/trading company to market DZP products in Europe and North America; and
- Ceramic colours laboratory developed in Perth produce test products for ceramic tile industry.
For the Niobium:
- JV with European Treibacher IndustrieAG to produce and market ferro-niobium; and
- Test work for tantalum recovery.
For the Light rare earths and Heavy rare earths:
- Japan’s Shin-Etsu Chemical toll treatment JV for separation and sale.
A $1 billion DZP finance package being arranged by: Credit Suisse (Australia),
Sumitomo Mitsui Banking Corporation; and Petra Capital.
Finance sources include the possible sale of a strategic minority stake in the DZP; International Government funding (ECA); Commercial debt facility; and / or Public equity raising.
Alkane has a clear path to multi-commodity production, with gold production at Tomingley providing funding for the DZP.
The company's projects hold plenty of upside, such as longer mine life at Tomingley and / or the DZP. However, with first cash flows due in early 2014, this is not factored into the share price and valuation.
Nor is the cash and investments of $100 million (at June Qtr) which translated to $0.26 a share against a share price of just $0.395. Clearly, to say Alkane is undervalued is a truism.
Share price catalyses include positive outcomes from DZP joint ventures, and also the added potential of including the recovery and sale of tantalum - which is currently not in the DFS - and first cash flows from Tomingley.
Not to be forgotten is potential for exploration projects to convert to developments, with Alkane having a successful history of doing so.
Look also for Alkane to pay dividends as soon as it can. Proactive Investors estimates 6-9 month target price for Alkane of $0.49 - $0.58.
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