Alkane at the right gold place at the right time
Forget about buying a gold asset on the cheap anymore — that window has closed. Every gold miner or developer will be holding on tight to deposits. Just look at the performance: the metal up 24.3% for the first half of 2016, the best first half since 1974 for the metal. The Brexit vote result saw an 8% leap in one day (to $1,358/oz), the best one-day performance since 2008. But the metal is getting harder to find; Newmont Mining is predicting world output to fall by 7% by 2012. According to the Thomson Reuters service, gold is the second best performing asset in the first half of 2016: only Brent crude has outperformed (up 35.8%); the only other metal cited is copper, up 2.6%.
But this is not the only reason why a company such as Alkane Resources (ASX: ALK | OTCQX: ANLKY) is of interest (although the looming world gold crunch would be reason enough).
Those other reasons are:
- There is a growing consensus that the gold price is on the move upwards, which will fatten miner margins; and
- In the case of Alkane, it is in a relatively narrow field of choice for investors.
As we reported on InvestorIntel this week, Liechtenstin-based Incrementum is predicting a gold price of $2,300/oz by June 2018. Now we have Credit Suisse saying gold prices will peak at $1,500/oz in the first quarter next year; the average for the second half of this year is forecast to be $1,413/oz. And then there was Goldman Sachs – you know, the crowd that keep chanting for months and months (or was it years?) that gold was going to fall below $1,000/oz. Never mind, they stuck by those guns – until now. Now Goldman Sachs is saying the average price for the remainder of 2016 will be $1,300/oz, for 2017 $1,280/oz and 2018 it will average $1,250/oz. Given Goldman Sachs’ level of error over the past year or so, one might be forgiven for expecting gold to actually make well above those forecasts.
But to get to Alkane specifically, gold has been its prop in recent times. Analysts have made the point that Alkane’s market valuation is based almost entirely on its revenue stream from its Tomingley gold operation in New South Wales. By contrast, little market valuation is attached to the flagship Dubbo Zirconium Project, although in the long term it would be the bigger (by far) cash generator once they company gets into production there.
At a gold price standing, as these words were written, at $1,330/oz, Tomingley is economic even though, as Perth analysts Hartleys noted earlier this year, the all-in sustaining cost guidance was given in the March quarterly report at between A$1,250 and A$1,350 an ounce. At today’s exchange rate, the US dollar price translates to $1,784/oz in Australian dollar terms.
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But there is another wrinkle to this story: according to Brisbane-based industry number-cruncher Austex Mining, as of March 31 there were just 37 gold producing companies listed on the Australian Securities Exchange. Sure, there are foreign-owned producers in the country but, even so, that is quite a narrow base considering that Australia is the world’s second largest gold producer (after China).
What this means is that investors have a limited choice to ride the predicted coming gold recovery. Of those 37, only 10 are producing at an annualized rate of 160,000oz or more, so that limits the field even more.
Certainly, also, there are plenty of ASX-listed explorers but when gold is riding high you want to be on the horse that is actually pulling the yellow metal out of the ground and getting full advantage of the rising price.
And, also according to Austex, there are not all the many near-term new explorers. Only five new players were expected to be in operation over the past three months – but together they are expected to add only 200,000oz a year to Australia’s output.
More concerning is that Austex says it could see only one significant new entrant in the second half of 2016. Longer term, nine companies have indicated they will restart projects now under care and maintenance. “Five companies are suggesting 2017, but most lack the cash and market support at this time,” says the report.
So, for Alkane, they are in the right gold place at the right time.
There is one caveat, however: Alkane is not a pure gold play; indeed it is expecting a six-year mine life for Tomingley. But the company’s past performance would give hope that it will still be looking for other gold opportunities.
You can take one of two points of view, it seems to me. One is to regard Alkane as primarily a technology metals company that still needs to get development under way, and not view it as a gold company. Or, two, you could take that perception and tip it on its head, arguing that the DZP is a substantial project but having gold output in the meantimes means (a) providing ongoing finance to keep Alkane heading towards its goal and (b) the gold is a big plus and reassurance that Alkane has a steady underpinning.
There are no doubt other REE hopefuls who wish they were in the same position.
Disclaimer: The writer is not implying any investment recommendation or advice.
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