Alkane Resources' rare earths valuation leaves plenty of upside

As the sole owner of a substantial rare earth deposit and two gold properties in central New South Wales, Alkane Resources (ASX:ALK)  looks set to play a significant role as a miner of “strategic” rare earth minerals in the near future, while it also develops two gold projects.

The Chinese Government recently announced that they are considering stricter limits on the exports of rare earth minerals despite already accounting for 90% of worldwide production.

On the flip side, worldwide consumption for rare earths is forecast to rise as demand for new technology products such as hybrid cars, wind turbines, cell phones and laptops which contain significant quantities of these “high tech metals” including magnets, batteries, auto catalysts, refining catalysts, polishing powders, glass additives, phosphors and alloys.

Demand is expected to hit 185,000 tonnes by 2014 with mine production only reaching 135,000 tonnes -and that includes substantial new production from Western Australia’s Mount Weld mine - according to Lynas Corporation (ASX:LYC).

There are only four worldwide projects outside of China capable of supplying rare earths that can be in production before 2015. Three are in Australia, including Alkane’s Dubbo Zirconia Project and one in the USA run by MolyCorp at Mountain Pass which plans to ramp annual production to 20,000 tons by 2012. The U.S. government is so concerned that it discussing legislation to provide loan guarantees for the mining and refining of rare earths for industry and defense.

Chinese interests recently attempted to corner the market for foreign rare earths by purchasing a 51.5% interest in LYC for A$500 million / US$425 million, but were rebuffed by Australian Regulators at the Foreign Investment Review Board. Other Chinese interests snagged 25% of Arafura Resources (ASX:ARU) which is establishing a mine at Nolan’s in the Northern Territory. These two miners will represent about 25% of the world supply of rare earths when on stream by 2013.

Dubbo Zirconia Project

The Dubbo Zirconia Project contains a measured and inferred resource of 73.2 million tonnes at a combined grade of 3.38% of zirconium, hafnium, niobium, tantalum, yttrium and rare earths. The deposit also contains uranium at a grade of .014% for a total resource of 23 million lbs which represents over a billion dollars in revenues over the life of the mine.

Uranium mining is currently banned in New South Wales but this could be challenged in Federal Court or a deal worked out, as Australia is a major exporter of uranium. ALK says that the market for zircon and nobium will go into shortfall by 2013 and is looking at prefeasibility studies for annual production rates between 400,000 - 1,000,000 tonnes of ore to produce between 15,000 - 37,000 tonnes of zircon and 2,000 - 5,000 tonnes of nobium plus associated rare earths for annual revenues of US$100 - $250 million.

Capital cost of the mine is estimated at A$150 million and production will continue for 80 - 200 years.

The government run research facilities of ANSTO at Lucas Heights (near Sydney) is running pilot plant studies and specializes in uranium ore processing and removal of radioactivity. So far the plant has produced 1,300 kg of zirconium chemicals, nearly 300 kg of nobium concentrate, yttrium and rare earth products. No indication of costs is available but the pilot plant can model various process flow sheets that will define capital and cash operating costs. Potential clients are now evaluating the substantial amount of refined and concentrated products for suitability, pricing and potential sales contracts that will support financing proposals for the mine.

Infrastructure costs will be low as the project is located 12 miles from Dubbo in Central New South Wales. The area has main roads, railway, water, electricity, gas, substantial population and many small industries that can support the mine. A timeline to get the project into production by 2013 is being pursued.

The current market capitalization of ALK is measured at 5-10% of Molycorp’s Mountain Pass Mine and LYC’s Mount Weld Project which attests to the great value in this little company before we even look at its near term gold production and exploration potential.  The ALK market price has fallen in line with the recent mini GFC fallout and for longer term investors, must represent some value at current prices.

Tomingley Gold Project

Tomingley is 24 miles from the Dubbo Zirconia Project. Three open pittable resources called Caloma, Wyoming One and Wyoming Three, were drilled to a shallow depth for a resource of 850,000 ounces of gold which includes an underground component for Wyoming One. Prefeasibility studies indicated a cash operating cost of A$800 per ounce at a rate of 50,000 ounces per year. The study also found that substantial infrastructure costs to bring in water and power and build an underpass under a major road that cuts between the pits indicated more ore was required to justify capital costs.

This led to the search for more resources with positive drilling results from beneath the floor of the proposed Caloma pit where a conceptual target of one million tonnes at 3.5 grams per ton for 120,000 ounces was indicated.

A new ore zone was also uncovered by recent drilling 250 meters south of Caloma which assayed several +3 gram per tonne intersects where the orientation of this east west trending porphyry over 300 meters looks similar to the high grade zones in Wyoming One and Three.

Detailed geological assessment indicates that Caloma may consist of several ore blocks separated by faults. A 3,500 meter rotary core drilling program to scope this zone starts this month. Positive results will lead to more drilling to prove up a resource which may lead to a mine decision before the year is out.
 
Orange District Joint Venture with Newmont may herald major Australian gold find

Gold mining heavyweight Newmont (NYSE:NEM) has earned 75% of the Molong and Moorilda Prospects from ALK. This ground partially surrounds the Newcrest Mines at Cadia that host massive resources of 44 million ounces of gold and 7.98 million tonnes of copper. 

Prior drilling by NEM outlined a conceptual target of 2-4 million ounces of gold and 50-100,000 tonnes of copper at McPhillamy’s within the Moorilda Prospect. The exploration program for this year will be A$2.3 million and includes 4 holes for 3,500 meters to test for depth and continuity of mineralization, and potentially may render this one of Australia’s largest recent gold finds.