EDITOR: | February 19th, 2015 | 16 Comments

Alkane Resources and its Hidden Cash Generator – Gold.

| February 19, 2015 | 16 Comments
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Before there was Alkane the Rare Earth developer, there was Alkane the gold miner… and in fact there still is Alkane the gold miner.

As we have noted in the past Alkane Resource Ltd. (ASX: ALK | OTCQX: ANLKY) is prismatic and looks different to different people depending what angle they come at it. In recent years most of the public spotlight has been shone on the Dubbo Zirconia Project (DZP) that is multi-metal in nature, with zirconium (hafnium), niobium (tantalum), yttrium and rare earth elements. As such it is one of the world’s largest in-ground resources of rare metals and rare earths. However, there are more strings to Alkane’s bow than just this one, as the company has long been a gold producer, on and off, and is pursuing an intriguing and admirable strategy of “multitasking” with gold providing cashflow in the short-term while its big project moves towards fruition. I intend to focus here on the rarely-mentioned gold operations because it would seem natural that this might be spun out to shareholders at a future date once the company becomes overwhelming a REE and Zircon miner. As I have oft-noted spin-outs or demergers can be a good bonus prize for long-term shareholders.

Gold – a long-time interest

Alkane’s gold focus in recent decades has been in the Tomingley area, which is situated within the northern Macquarie Arc, part of the Lachlan Fold Belt, in central western NSW. The company firstly operated the Peak Hill Mine for many years and now its focus is on the Tomingley set of deposits from which production began in the first half of 2014.

Alkane has concentrated its gold efforts in this area as the Ordovician volcanic rocks of the Macquarie Arc host some of Australia’s largest gold and copper-gold deposits including the > 1.3 mn oz Northparkes deposit (formerly RTZ and now China Moly/Sumitono), the > 3 mn oz Cowal deposit (Barrick Gold-now announced to be sold) and the > 30 mn oz Cadia-Ridgeway deposits (Newcrest).

The Peak Hill mine pictured below was operated by Alkane from 1996 to 2006.

PHGM

At Tomingley (about 20kms north of Peak Hill), Alkane has commissioned Feasibility Studies, which were completed in 2010, that identified the potential for three open pit mines, Wyoming One, Wyoming Three and Caloma, and a longer term underground development at Wyoming One.

The History

The Tomingley region has been the subject of mineral exploration activities since before 1889. Gold was discovered at Tomingley in 1879 sparking a gold rush and the Tomingley Gold Field was proclaimed on the 19th June, 1882. Production was focussed on a narrow belt of Ordovician volcanics between Forbes and Tomingley. Oxide zone and hard rock sulphide zone workings in the region prior to 1981 yielded an estimated 70,270 oz from the Tomingley area, the bulk of which came from the Myalls United mine which operated from the 1890s, about  500 m south of the Wyoming deposits. An estimated 86,900 oz was also mined from around Peak Hill pre-1981, mostly as alluvial gold. Further gold extraction by Alkane, using cyanide heap-leach, from the oxide zone at Peak Hill yielded 153,000 oz. This operation ceased in 2005. Alkane estimates that around 467,000 oz remain at Peak Hill, below the weathering front, as sulphide ore.

tomingley

The Tomingley Project

Tomingley is a medium-sized gold project with approximately 921,000 ounces of gold in the current defined resource space. The project is composed of a large north-south oriented tenement package covering Ordo-Silurian volcanics and sedimentary rocks with minor intrusives. Significant mineralisation in and about the project area includes the Wyoming Gold Deposits, the Peak Hill Gold Mine and the historic Myalls United Gold Mine.

The exploration discovery of Tomingley happened as long ago as 2001, with Alkane then launching a resource definition campaign consisting of 1,602 drill holes (RAB, RC, Diamond drilling) amount to 160,784 metres. This drilling plus the cost of the feasibility studies has resulted in an expenditure so far of around AUD$13 million.

tomingley_resource

The project at Tomingley has been developed with the aim of producing 50,000 – 60,000 ounces of gold per year, based on an annual ore throughput of around one million tonnes. Mining operations commenced at Tomingley in January 2014 with the commissioning, with the first ore feed to the mill, on 16 January 2014. The company poured its first gold bar on 14 February 2014, so just one year ago. Tomingley has an expected mine life of 7.5 years though the resource has a target life of 10-12 years. We expect that much depends, as usual, on the gold price and resource expansion.

The Miracle of Cashflow

Unlike the most in the Rare Earth space, Alkane can point to having a sizeable cashflow. Despite the sloppy gold price in the second half of 2014 (really since production commenced) the company had revenues of AUD$56.9mn in the six months to the end of December and  AUD$23.5mn in the quarter ended December 31st. Since the year began the gold price has perked up, oil prices have plunged and the AUD has moved favorably for Antipodean gold producers so Alkane should be in a position to be highly cashflow positive from its Tomingley “sideline”.

An Interesting Aside

I am quite a fan of biogeochemistry, which is only somewhat more respectable than homeopathy in some geological circles. So I was intrigued to see that a biogeochemical survey of a large windrow of mature native trees, running almost directly across strike, commenced during January 2005, to determine whether the trees could be used to penetrate the significant transported cover to detect the Wyoming gold deposits.

Despite the sceptics this technique is a very good indicator for Rare Earths in particular, with trees bringing the minerals up through their roots to the leaves which are then shed making a layer of REE-enriched detritus at surface. One of the more bizarre manifestations is with Selenium, where plants called Loco Weed bring the element to the surface and then cattle that eat the weeds go quite literally “loco”.

Conclusion

Alkane’s gold “personality” was around long before Rare Earths were even heard of. And it is still around. Likewise Alkane’s Dubbo Zirconia Project (DZP) was around before the REE boom erupted and is still here after the tide has gone out. Due to the size of the resource, the mine is expected to process 1,000,000 tonnes of ore throughput per year over a period of 70 years or more.

Having a cashflow from the gold operations means in the very short term that the company does not need to go back to the well to fund day to day operations and thus its big “ask” is only the capex for the Dubbo project rather than rattling the cup to investors to pay to keep the lights on at HQ, like so many others. Eventually we would expect the gold assets to exit stage left and a spinout for shareholders or trade sale may be the result.


Christopher Ecclestone

Editor:

Christopher Ecclestone is the EU Editor for InvestorIntel and is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten ... <Read more about Christopher Ecclestone>


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Comments

  • Tracy Weslosky

    Thanks Christopher. Our InvestorIntel audience may appreciate that Christopher Ecclestone will be on BNN this morning at 11:40AM EST to discuss — GOLD. I would like to add that ANLKY is the #3 largest market cap in the Rare Earths sector, and that you may enjoy the interview I will be publishing by early next week on their niobium and hafnium…an excellent well rounded star in the resource sector!

    February 19, 2015 - 9:08 AM

  • Positroll

    “Eventually we would expect the gold assets to exit stage left and a spinout for shareholders or trade sale may be the result.”
    I don’t think so, at least not in the mid-term. While the board once considered such a split, they decided against it. Instead, our CEO has always been quite clear that he likes the multi-resource approach, with one part of the co helping the other grow, and gold hedging industrial metals: We sold McPhil (gold) to RRL to finance Tomingley. Now Tomingley helps finance DZP (esp the FEED and early works this year, but it should also provide more equity for capex in CY 2015,16+17). Once the DZP is up and running, it in turn will help finance our 4-5 other gold/base metal projects, besides adding hafnium and tantalum circuits and moving the DZP to a 1,5 MTPA operation once China is healthy again …

    February 19, 2015 - 9:21 AM

  • Positroll

    to the mods: it might be useful to also publish this article on the REE page …

    February 19, 2015 - 9:23 AM

  • Tracy Weslosky

    Thx for alerting us that there was a technical error Positroll…it was published incorrectly this AM, and this has been remedied as ALKANE is indeed: an REE Leader.

    Also, here’s the link to Christopher on BNN today — Asher just sent it my way: http://www.bnn.ca/Video/player.aspx?vid=554640

    February 19, 2015 - 12:53 PM

  • Investor

    If we are counting on gold to finance the DZP we are looking at the slow death or unnecessary waste of money. Not the best solution for the shareholders who have invested in ALK because of gold and other assets / exploration targets. Go and have a look at their website.
    FOR OF THOSE ON THIS BLOG, ALK IS NOT A RARE EARTH JUNIOR. IT IS MULTI-METAL COMPANY.
    The name is Dubbo Zirconia Project. So the main commodities are; Zirconium, Hafnium, Niobium, Tantalum and Rare Earths.
    Why is the DZP not worth pursuing? Because the ore body is not amenable to beneficiation. This means large CAPEX. Metallurgy 101. The CAPEX will be 1 billion dollars. Yes one billion. Now if one invests this large amount of money one expects the return on the investment. Back to metallurgy 101, multi metal deposit means complex flowsheet in order to extract all those elements and meet the desired customer specifications.
    GOOD LUCK!
    .

    February 19, 2015 - 7:01 PM

  • Christopher Ecclestone

    I am not suggesting that the gold is financing the REE project just that the useful net cashflows from that source will mitigate the need for extra funds to cover overheads, exploration or other efforts at the corporate level. One would suspect that DZP will be financed on the project level. This leaves us hoping that there is thus no need for further dilution at the top level.

    February 20, 2015 - 7:16 AM

  • Positroll

    1) Gold has already financed part of the DZP capex (FEED: 50 mio; other capex: 10-20 mio.)
    2) Alk has declared that it will use TGP cashflow to finance early works at Dubbo and to order long lead items.

    3) Investor: You are so way off, I don’t even know where to start.
    a) First, according to the DFS, capex is 800 mio +/- 16%. That means capex could reach 960 mio if things go very wrong (the famous “billion”), but also be as low as 640 mio.
    b) Then, you can deduce >150 mio from that for spent / available equity (50 mio FEED, 20 mio add capex, 2015,16+17 profit from TGP). That leaves 800-150=650 +contingencies.
    c) For a project that will rake in 200-300 mio profit / year for 70 years. That’s a great return on investment in my books …

    Ask yourself a different question: If you had a project that’s bringing in 2-3 mio / year for 70 years that costs about 8 mio to build (maybe 6,5, maybe 10) , is it worth it? If the answer is yes, the same applies to the DZP …

    February 20, 2015 - 11:13 AM

  • Positroll
    February 20, 2015 - 11:16 AM

  • Investor

    Positroll, wait on the FEED to be finished. One billion or higher is the figure. As for the return on the investment and more discussion on CAPEX, take metallurgy 101.
    Chris, cash from the gold is already being used for DZP. I would rather have this cash as dividends

    February 22, 2015 - 6:16 PM

  • Fred

    The way I look at it, the gold pays the bills and keeps them in business without issuing more stock. It also provides credibility for the company as a real life miner, rather than a wannabee. DZP, or similar such projects, hold the potential for making the stockholders rich. Lord only knows if they will be, but having the gold means that management has a long time to get the next project happening properly.

    February 22, 2015 - 6:50 PM

  • Investor

    The time and money could be spent on others tenement in ALK possession. Too much time and money has been wasted on DZP. As I noted above it requires a fresh look from outside.

    February 22, 2015 - 9:22 PM

  • Positroll

    You want to dump a project that is almost ready to go and that will bring in 200-300 mio year op profit for 70 years ? Forget about metallurgy – you failed maths 101 …

    February 23, 2015 - 9:29 AM

  • Positroll

    Looking forward to the interview. Can you tell us when it will come out?

    February 24, 2015 - 10:06 AM

  • Tracy Weslosky

    Will be published today — as soon as I complete these 2 meetings: I need to edit the text, and we will go ‘live’. PS> This article was the #8th most read column of last week….lots of ALKANE audience members on InvestorIntel.

    February 24, 2015 - 10:07 AM

  • Positroll

    Thanks. Good to know …

    February 24, 2015 - 10:09 AM

  • Positroll

    P.S. Well, with Lynas’ SP beaten down and NTU going (even more) Chinese, Alkane is Australia’s biggest (SP wise and wrt probability of success) hope to break the Chinese monopoly anytime soon …

    February 24, 2015 - 10:12 AM

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