Alkane Resources Ltd (ASX: ALK) has signed an exclusive worldwide marketing, sales and distribution agreement with Minchem Ltd for all zirconium materials produced by the Dubbo Zirconia Project (DZP).
At full capacity the DZP will produce zirconium products worth US$100-US$120 million annually.
England-based Minchem is a technical ceramics marketing and manufacturing business that has been involved in zirconium chemicals and zirconium dioxide products for over 40 years.
The five year agreement will commence upon production from the DZP and an option will exist to extend the term for an additional five years upon mutual agreement.
The DZP has received all required government approvals, is construction ready with projected annual revenue from the project estimated to be US$430-$470 million.
Alkane will become the world’s largest producer of heavy rare earths outside China, with products principally used for rare earth magnets and special ceramics and alloys.
Dubbo Zirconia Project (DZP)
The DZP is located 400 kilometres northwest of Sydney and is a large polymetallic resources containing zirconium, hafnium, niobium, yttrium and rare earths.
The project has reserves to support a 35 year mine life and it has a net present value (NPV) of US$0.92 billion and 17.5% internal rate of return (IRR).
This agreement with Minchem comes a couple of months after Alkane signed a letter of intent with Vietnam Rare Earths JSC (VRE) for toll processing of rare earths concentrates, with these agreements advancing the DZP financing process.
The DZP is now construction ready with financing currently in progress with production anticipated to commence in 2018.
Zirconium
The DZP plans to produce over 16,000 tonnes per annum of zirconium products, including zirconium chemicals, zirconium dioxide and value added zirconium products.
Annual revenue from zirconium products at full capacity is estimated to be US$100-120 million at current spot prices.
This agreement provides Alkane with an experienced partner to market DZP zirconium products directly to key end users in all major markets.
The zirconium chemicals market consumes about 21% of annual zircon production and is the fastest growing segment of zircon consumption.
The zirconium chemicals markets has a forecast compound annual growth rate of 5% and is expected to be worth in excess of US$1.5B per annum by 2025.
Analysis
The signing of this exclusive agreement with the experienced Minchem is an important step for Alkane as it moves towards securing financing for the DZP.
The agreement significantly de-risks the project and furthermore validates the quality of the project and its US$0.92 billion valuation.
The demonstration pilot plant trials for the DZP are scheduled to commence in August for additional products for customer certification.
The company’s financing strategy targets a combination of export credit agency finance and bank debt, with discussions well advanced.
The DZP has been referred to by market commentators as the most advanced and arguably best rare earth elements and specialty metal project in the world.
The Alkane share price is up 35% over the past three months trading at $0.285.
With the Tomingley Gold Operations (TGO) providing cash inflow, Alkane remains well funded with A$29.8 million in cash and bullion at the end of the June quarter.
Tomingley Gold Operations (TGO)
TGO is a cash producing asset that supports the development of the DZP.
TGO is a medium-sized gold project with circa 900,000 ounces of gold in the current defined resource space. The resource has a target life of 10-12 years.
Alkane produced 67,812 ounces of gold in FY16, which meant it successfully achieve its FY16 guidance target.
During FY16, gold was sold at an average price of A$1,605 per ounce generating A$109.1 million and net operating cash flow of A$27.6 million.
TGO site costs for FY16 were A$1,124 per ounce and all in sustaining costs (AISC) were A$1,256 per ounce.
Costs are evidently decreasing with the most recent June quarter achieving site costs of A$1,009 per ounce and AISC of A$1,149 per ounce.
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