3 September 2020 On 30 July, Alkane achieved its goal of demerging Australian Strategic Materials (ASM) in order to become a purely gold-focused miner. Since then, it has announced FY20 results, including an updated reserve & resource statement and the results of additional drilling at Boda, which continue to be consistent (in our opinion) with its hosting a multi -million- ounce gold resource. This note updates our financial forecasts and valuation in the aftermath of the ASM demerger in particular and also the material (12.0%) strengthening of the Australian dollar vs the US dollar. Year end Revenue (A$m) PBT* (A$m) EPS* (c) DPS (c) P/E (x) Yield (%) 06/19 94.0 25.4 4.57 0.00 24.9 N/A 06/20 72.5 20.6 2.56 0.00 44.5 N/A 06/21e 105.7 23.5 2.96 0.00 38.5 N/A 06/22e 126.5 27.5 3.46 0.00 32.9 N/A Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. ASM (Dubbo) demerger dividend The in specie distribution of ASM shares (incorporating the Dubbo rare earths project) to Alkane shareholders was completed on 28 July, in the ratio of one ASM share per five ALK shares. All other requirements having been met, ASM’s first day of trading was Thursday 30 July. Taken together, the combined value of ‘new’ Alkane and ASM shares on 30 July implied the crystallisation of an immediate 29.5c ASM demerger dividend for Alkane shareholders (note: the gold price fell US$14/oz that day) – a number that, if anything, has only increased subsequently as ASM’s fundamental value has increasingly been reflected in its rising share price. Reserves expanded and extending In its updated FY20 reserve and resources statement, Alkane revealed a 1.6Mt increase in reserves at Tomingley (notwithstanding depletion), which is sufficient to increase its life to three years from the end of FY20 (even at higher production rates), with resources potentially able to support production for an additional 6.4 years thereafter. We estimate that Roswell and San Antonio could potentially add another 15 years to the life of operations and should add circa another nine years. NB Updated resource statements for Roswell and San Antonio (including resources in the indicated category) are anticipated in October, as are updated mine plans. Valuation: 55c confirmed plus up to 70c contingent Even against the headwind provided by the Australian dollar, our updated valuation of Alkane nevertheless confirms a value of 21c/share on its Tomingley asset plus cash (cf 25c previously, but with A$20m having been demerged with ASM). To this should then be added a further 29c for Alkane’s investments in Calidus and Genesis and at least 5c for its maiden Roswell and San Antonio resources. To this total of 55c can then be added up to a further 70c in value from contingent assets (especially Boda), the final valuation for which will depend on additional, future exploration success (see Exhibit 15). Alkane Resources Demerger update Reborn Price A$1.14 Market cap A$679m A$1.3890/US$ Net cash (A$m) at 30 June 2020* 41.7 *Pro-forma post-demerger Shares in issue 595.2m Free float 78% Code ALK Primary exchange ASX Secondary exchange OTC QX Share price performance % 1m 3m 12m Abs (17.2) 24.1 173.7 Rel (local) (19.1) 15.8 184.8 52-week high/low A$1.3 A$0.4 Business description Alkane Resources is an Australian production and development company. It previously produced 70,000oz of gold per year from the open-pit operations at its Tomingley gold mine, but is now transitioning to underground operations and expects to produce around 47,500oz in FY21. Next events Q121 activities & cash-flow reports October 2020 Updated resources October 2020 Updated mine plans October 2020 Annual general meeting November 2020 Analyst Charles Gibson +44 (0)20 3077 5724 [email protected]Edison profile page Metals & mining Alkane Resources is a research client of Edison Investment Research Limited
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Alkane Resources Demerger update · Alkane and ASM shares on 30 July implied the crystallisation of an immediate 29.5c ASM demerger dividend for Alkane shareholders (note: the gold
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3 September 2020 On 30 July, Alkane achieved its goal of demerging Australian Strategic
Materials (ASM) in order to become a purely gold-focused miner. Since
then, it has announced FY20 results, including an updated reserve &
resource statement and the results of additional drilling at Boda, which
continue to be consistent (in our opinion) with its hosting a multi-million-
ounce gold resource. This note updates our financial forecasts and
valuation in the aftermath of the ASM demerger in particular and also the
material (12.0%) strengthening of the Australian dollar vs the US dollar.
Year end Revenue
(A$m)
PBT*
(A$m)
EPS*
(c)
DPS
(c)
P/E
(x)
Yield
(%)
06/19 94.0 25.4 4.57 0.00 24.9 N/A
06/20 72.5 20.6 2.56 0.00 44.5 N/A
06/21e 105.7 23.5 2.96 0.00 38.5 N/A
06/22e 126.5 27.5 3.46 0.00 32.9 N/A
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.
ASM (Dubbo) demerger dividend
The in specie distribution of ASM shares (incorporating the Dubbo rare earths
project) to Alkane shareholders was completed on 28 July, in the ratio of one ASM
share per five ALK shares. All other requirements having been met, ASM’s first day
of trading was Thursday 30 July. Taken together, the combined value of ‘new’
Alkane and ASM shares on 30 July implied the crystallisation of an immediate
29.5c ASM demerger dividend for Alkane shareholders (note: the gold price fell
US$14/oz that day) – a number that, if anything, has only increased subsequently
as ASM’s fundamental value has increasingly been reflected in its rising share
price.
Reserves expanded and extending
In its updated FY20 reserve and resources statement, Alkane revealed a 1.6Mt
increase in reserves at Tomingley (notwithstanding depletion), which is sufficient to
increase its life to three years from the end of FY20 (even at higher production
rates), with resources potentially able to support production for an additional 6.4
years thereafter. We estimate that Roswell and San Antonio could potentially add
another 15 years to the life of operations and should add circa another nine years.
NB Updated resource statements for Roswell and San Antonio (including resources
in the indicated category) are anticipated in October, as are updated mine plans.
Valuation: 55c confirmed plus up to 70c contingent
Even against the headwind provided by the Australian dollar, our updated valuation
of Alkane nevertheless confirms a value of 21c/share on its Tomingley asset plus
cash (cf 25c previously, but with A$20m having been demerged with ASM). To this
should then be added a further 29c for Alkane’s investments in Calidus and
Genesis and at least 5c for its maiden Roswell and San Antonio resources. To this
total of 55c can then be added up to a further 70c in value from contingent assets
(especially Boda), the final valuation for which will depend on additional, future
Source: Alkane Resources, Edison Investment Research. Note: Forecast average realised gold price in Q1–Q420 excludes forward sales over 17,770oz at an average price of A$1,836/oz.
Among other things, readers should note Edison’s short-term gold price forecast in Q121 and Q221
and our relatively conservative assumption that it will fall to US$1,749/oz (in real terms) in CY21
coupled with a US$/A$ rate that is lower/stronger (as far as the Australian dollar is concerned) than
at any time since March 2019 (NB this forex rate recorded a recent peak of A$1.7408/US$ on 19
March 2020).
A summary of Alkane’s implied H220 forecast results in the context of recent half-year periods is
provided in the table below. Readers should note the anomaly whereby Alkane’s H119, FY19 and
H120 results were reported with its ASM numbers fully consolidated, but its FY20 results were
reported with ASM reflected as ‘classified as held for distribution to owners’ and/or ‘di scontinued’.
The consequences of this are most obviously apparent in the line items entitled ‘loss after tax from
discontinued operations’. However, this anomaly is not considered material enough to significantly
detract from the overall trends apparent from the figures. Our updated forecasts for FY21, within the
context of our quarterly forecasts, disclosed in Exhibit 2, above, are also provided:
Alkane Resources | 3 September 2020 4
Exhibit 3: Alkane FY20 results vs H119, H220, FY20e and FY21e (A$m, unless otherwise indicated)
Source: Edison Investment Research. Note: *Edison estimates; **From Newcrest reserve & resource statement, 31 December 2019; ***Conducted at prices of US$6,529/t Cu and US$1,919/oz Au.
Clearly such an estimate is very far from being anything close to JORC code -compliant and
experience would suggest that such estimates have an accuracy of approximately ±75%. However,
the increasing number of results in the region of 6.4–8.3Moz contained gold increases our
confidence that the ultimate resource estimate will be of this order of magnitude. If this does prove
to be the case, then it would suggest a multi-million ounce gold deposit at Boda with a potential
valuation (based on the US$24.08/oz average valuation of in-situ ounces calculated in our report
Gold stars and black holes, published in January 2019) of A$0.36–0.47/share at updated forex
rates and adjusted for the increased number of shares in issue at Alkane (cf 0.55/share previously).
In the meantime, a major reverse circulation (RC) and diamond core drilling programme has been
started in order to further test the high-grade core and larger resource potential at Boda, as well as
other regional targets defined by both the 3D-IP survey and existing Alkane data.
COVID-19
Since February, Alkane has been acting in response to information supplied by state and fede ral
authorities and complying with recommended measures to combat COVID -19. These include
heightened cleaning protocols, social distancing, stringent hygiene practices and health screening.
TGO is a predominantly a residential operation and only personnel and contractors essential to the
safe operation of the mine are permitted on site. All non-essential travel has ceased.
At present, operations continue as planned. However, COVID-19 has the potential to interrupt
operations in the event of any of the following:
◼ despite the extensive measures taken, sufficient employees test positive for COVID -19 and the
majority of any crew is unable to attend while they self-isolate;
◼ despite increasing inventory from suppliers and continuing to liaise closely with them, their
capacity to supply critical parts and reagents is compromised; and/or
◼ the New South Wales State government introduces regulations that inhibit suppliers or
employees from attending beyond a skeleton crew.
Alkane Resources | 3 September 2020 11
Tomingley valuation
As always, our valuation of Tomingley is based on the present value of our forecast life of
operations dividend stream to investors in Alkane as a result of the execution of the Tomingley mine
plans (now shorn of any contribution from Dubbo/ASM) discounted back to present value at a rate
of 10% per year, excluding exploration expenditure.
Relative to our last note, we have now extended our life of operations at Tomingley by one year to
the end of FY23, in line with the life implied by its updated reserve and resource statement
(effective date 30 June 2020 – see Exhibit 4). In the aftermath of the demerger, our valuation of the
dividend stream potentially available to Alkane shareholders from its immediate Tomingley
operations is now A$0.186/share. However, to this must be added the va lue of residual resources at
the end of the life of operations, which we estimate to be 0.4Moz with a current value of US$10.3m
(A$14.3m), or A$0.024/share, to bring our total valuation of Tomingley to A$0.210/share (including
cash). This may be rationalised as our prior valuation of Tomingley (see below) plus cash of
A$0.25/share less A$20m (A$0.034/share) in cash demerged with Dubbo/ASM.
A graph of our expectations for Alkane’s EPS, DPS and valuation from the present to FY23 is as
follows:
Exhibit 11: Alkane life of operations’ forecast EPS and (maximum potential) DPS (A$/share)
Source: Edison Investment Research.
Note that the DPS columns in Exhibit 11 represent theoretical, maximum potential dividends
payable, rather than actual dividends forecast and are used solely for valuation purposes. In reality,
we would expect any dividend that could be payable (in FY21 for example) to instead be re -
invested into the business, either in the form of exploration expenditure or capital expenditure to
develop Alkane’s options at Tomingley further.
The above valuation compares with our pre-demerger valuation (including Dubbo/ASM) of
A$0.77/share (see our note 007 strikes it rich, published on 23 April), of which A$0.25 in value was
accounted for by Tomingley and cash and A$0.52 was accounted for by Dubbo. In that case, the
equivalent graph of our expectations for Alkane’s EPS, DPS and valuation from the present to FY43
was as follows:
-
0.05
0.10
0.15
0.20
0.00
0.02
0.04
0.06
0.08
0.10
2020 2021 2022 2023
A$/shareA
$/sh
are
Basic adj. EPS (LHS, A$/share) Dividends per share (LHS, A$) NPV of DPS (RHS, A$/share)
resources from the inferred into the indicated category) are anticipated in October, as are updated
mine plans.
Gold price
As with all gold miners, Edison’s valuation of Tomingley is conducted in real terms at a flat nominal
gold price of US$1,892/oz, which declines (in real terms) to a price of US$1,494/oz in 2025.
Variations from this ‘base case’ scenario are considered in the table below:
Exhibit 14: Alkane Resources’ valuation sensitivity to the gold price (Australian cents per share, unless otherwise indicated)
Gold price change (%) -20% -10% u/c +10% +20%
ALK valuation 12.3 15.5 18.6 21.7 24.9
Valuation change -3.2 -3.1 0.0 +3.1 +3.2
Percent change from ‘base case’ -33.9 -16.7 0.0 +16.7 +33.9
Source: Edison Investment Research.
In the event that the gold price remains at US$1,919/oz in flat real terms (the price at the time of
writing), then our valuation of Alkane (based on the present value of potential dividends payable to
Alkane shareholders) increases by 21.0%, from 18.6 to 22.5 Australian cents.
Combined valuation of Alkane
A summary of our updated valuation of Alkane within the context of all of its assets is as follows:
Exhibit 15: Alkane Resources’ valuation summary (Australian cents per share)
Current Previous*
Asset Existing assets’
valuation
Contingent
assets’ valuation Potential total Existing assets’
valuation
Contingent
assets’ valuation Potential total
Tomingley plus cash 21 21 25 25
Dubbo - - 52 52
Sub-total 21 21 77 77
Investments in Calidus** and Genesis 29 29 14 14
Roswell and San Antonio maiden resources 5 15-24 24 6 10–19 19
El Paso and ongoing TGO exploration 4 4 5 5
Boda exploration 36-47 47 55 55
Total 55 55–75 125 97 70–79 170
Source: Edison Investment Research. Note: Totals may not add up owing to rounding; *Included Dubbo/ASM; **Excludes recent, additional A$3.2m investment by Alkane into Calidus in July 2020 at a share price of A$0.51/share (cf a share price of A$0.56 at the time of writing).
Opening net debt/(cash) (41,969.0) (72,003.0) (69,582.0) (41,732.0) (45,162.1)
FX
311.6 169.1 0.0 0.0 0.0
Other non-cash movements
16.0 0.0 16.0 0.0 0.0
Closing net debt/(cash) (72,003.0) (69,582.0) (41,732.0) (45,162.1) (66,908.1)
Source: Company sources, Edison Investment Research. Note: FY18 and FY19 income and cash-flow statements are pro-forma, sourced from Alkane’s Demerger Booklet released to the ASX on 17 June 2020; balance sheet is ‘as reported’ until FY20 at which point ‘group classified as held for distribution to owners’ is removed from the reported figures.
Alkane Resources | 3 September 2020 15
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