Alkane Resources trading at discount to valuation of A$0.91

London-based Edison Investment Research has prepared an analysis and valuation of Alkane Resources (ASX: ALK).   

"Alkane has its main project area centred south of the township of Dubbo in New South Wales. Having been formed in the late 1960s as a coal seam gas exploration company, Alkane has evolved into a mining exploration company with near term production from gold and rare metal and rare earth projects, an eventual 25% stake in a potentially lucrative joint venture with Newmont Australia Limited, and a number of other exploration targets.

A definitive feasibility study is underway at the Tomingley Gold Project to prove up the gold resource and incorporate a potential underground mining phase. Dubbo has a near endless supply of ore, with the project’s viability defined not through resource delineation but through process routes and the production of saleable concentrates to market.

These latter points are being addressed by Alkane’s own pilot processing plant located in Sydney, which has proven successful in producing quality zirconium, niobium and rare earth concentrates such that key letters of intent are being discussed with potential future buyers. These letters of intent are a key inclusion in a definitive feasibility study being completed for the project in H210.

With exposure to both near-term gold production and an advanced rare earths project, Alkane is unique among its peers. Mining at its Tomingley Gold Project is planned for 2012, while the Dubbo rare metal and rare earth project is expected to come online by 2013.

Capex for these projects has been estimated at A$90m and A$150m respectively. In addition, Alkane has a free carried 25% interest on a 2.96Moz gold resource currently being developed by Newmont. Together we value
these assets at A$0.91 per share.

Snapshot
Price: 33c
Market Cap: A$82m
ASX Code: ALK
Shares in issue: 249m
Price: 52 week High: 47.0c Low: 23.0c
Balance Sheet as at 30 June 2010
Debt/Equity (%) N/A
NAV per share (c) 17
Net cash (A$m) 8.7

Tomingley moving forward

Alkane’s main focus is to start mining its wholly-owned Tomingley Gold Project (TGP). The TGP contains a total resource of around 660koz gold, with initial plans to extract approximately 290koz via open pit in FY12-16, with a further 110koz from blending low grade stockpiled ore with high grade from a short underground mining phase in FY17-18.

Dubbo advancing

A 400ktpa production rate is scheduled for Dubbo, which contains a large 73Mt resource of zirconium, niobium and rare earth metals. Crucially Alkane has advanced the process routes for separating many of the valuable zirconium, niobium and rare earths products beyond that of many of its peers’ rare earths projects around the
world.

Confidence growing at McPhillamys

Alkane recently released an initial independent resource estimate for McPhillamys of 2.96Moz at 1g/t Au with gold recoveries between 86% and 91%. Alkane currently has a 49% interest in this project, which is majority held by JV partner Newmont Australia Ltd (51%), which, on completion of a BFS, will earn a further 24% stake.

Valuation: Shares trade at 68% discount to total valuation

Our valuation sees Tomingley come online in 2012 and Dubbo in the following year, with mine lives of seven and 20 years respectively. On this basis our discounted cashflow analysis is worth A$0.49 per share in current money terms (at a 10% discount rate). To this should be added A$0.42 for McPhillamys for a total valuation of A$0.91 per share.

Valuation: First cashflow forecast FY12

We have valued Alkane on a ‘base case’ scenario, with 2012 seeing the commencement of mining at Tomingley and Dubbo entering production in 2013. Tomingley is due to be mined over a seven year period and we have notionally valued Dubbo on a 20-year mine life, even though the current resource estimate indicates at least 200 years of ore, based on a 400,000tpa production rate. On this basis we estimate that the dividend stream to investors from 2010 to 2032 will be worth A$0.49 in current money terms (using a 10% discount rate to reflect general equity risk).

This then rises to A$0.59 in 2012 as Dubbo comes online and complements the TGP’s revenue stream. In addition to Tomingley and Dubbo an initial resource estimate has been completed for the McPhillamys deposit, which we have valued using derived figures for measured, indicated and inferred gold ounces. On this basis Alkane’s interest in the JV is worth A$0.42 per share resulting in a total valuation for the company of A$0.91."