A research report on Alkane Resources (ASX: ALK) by Edison Investment Research.
Investment summary: Positive re-rating:
Alkane has completed a DFS on its Tomingley Gold Project (TGP), which it intends to use to generate cash to develop its Dubbo zirconium and rare earths project (DZP).
The TGP will produce a total of 369,000 oz over a 7.5-year mine life at average cash costs of A$942/oz.
The project, pending successful financing, is due to start production in H212. More important, however, has been the steady rise in prices for zirconium-based products, niobium and rare earth metals.
This update looks at the effects of these price increases on the DZP and of a revised long-term gold price of US$1,350/oz on the TGP.
The DZP is one of the most advanced (with a production start during 2014) zirconium and rare earth deposits outside of China.
The broker now values Alkane’s assets at A$1.19 per share (previously A$0.91).
Tomingley to proceed to financing:
The DFS has outlined, with greater detail, the potential costs of operating the TGP, with first production in H212.
Production will come initially from open pit, with a small underground operation occurring at the end of the mine’s life, in 2018 and 2019.
Initial capex will be in the region of A$95m (including contingency of A$8.7m).
Once operating, the TGP could generate gross profits of around A$34m in years 2012-14 to re-invest into development of the DZP.
Dubbo very clearly the jewel in the crown:
Shares in the company have gained 160% since our July Outlook note ‘Alkane shows its metal’, with rare earth market price increases of 188% for HREE and 181% for LREE being the main catalysts.
Alkane is continuing work at its pilot plant to further refine REE concentrates into marketable products.
Valuation: Shares trading at 42% discount:
Taking into account our revised long-term gold price of US$1,350/oz for the TGP and the recent price increases for the DZP group of products, the broker now values the TGP and DZP at A$0.77 per share.
To this should be added A$0.42 for ALK’s eventual share (25%) of the ~3Moz McPhillamys gold deposit for a total valuation of A$1.19 per share.