Epstein interviews Ian Chalmers of Alkane Resources
The following interview of Managing Director Ian Chalmers of Alkane Resources (ASX:ALK | OTCQX: ANLKY) was conducted by phone and email on August 29th-Sept 1st, (EST) Alkane is a gold producer that has a very significant and advanced, world-classs Rare Earth Elements “REEs” project that includes zirconium and niobium. The company has two strategic partnerships and is negotiating a host of corporate initiatives.
Can you describe Alkane’s DZP project? How significant a project is it in the world?
Located 400km northwest of Sydney within a region that has substantial infrastructure – roads, rail, power, gas, people, being a large agricultural and mining area. The Dubbo Zirconia Project, “DZP” is a strategic and alternate source of heavy and light rare earths, plus zirconium and niobium products. The DZP can provide a long term supply of zirconium chemicals independent of the zircon supply chain, and critical rare earths not reliant on China. We have a very large polymetallic resource of the metals zirconium (hafnium), niobium (tantalum), yttrium and rare earths. Important, is the strategic metal mix – 25% of the rare earth portion of company-wide output is in the, “heavy” group.
Please speak a bit more about each of Alkane’s most important products
Our flow sheet produces zirconium, niobium and light and heavy REE concentrates. DZP’s tonnage is two-thirds zirconium which accounts for 31% of revenues. A light REE concentrate is projected to account for 20% of production and 24% of revenues, (of which 90% or 21.6%) comes from neodymium and praseodymium. Next, niobium accounts for 8% of production and 16% of revenues. Finally, heavy REE’s account for 5% by volume and 30% of revenues, (of which 28.5%) are expected to come from yttrium, dysprosium and terbium.
Commercial production is expected in about 2.5 years, making DZP fairly well advanced, how does it fit into the pipeline of other significant REE projects?
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Yes, the 2nd half of 2016 would be the best case, or the 1st half of 2017, we still need project approval from NSW. We thought that we would have approval by now to start on ground construction, but it might not be until December. We have committed to doing our initial Front End Engineering and Design. That will get us to a point early next year to discuss design and vendor financing and put out additional bids, we are already out for tender on a number of items. In absolute terms it’s a very large deposit. In relative terms, it’s one of the largest soon to be developed project in the world outside of China. Regarding the pipeline, we believe there’s a severe imbalance in that several light REEs projects are coming on stream, most notably cerium and lanthanum, which are in over-supply. Make no mistake, there are a few light REEs that are of critical importance and are in better balance.
Any comment on your share price decline of late?
Other funds have become traders, more specifically, we believe that 1 or 2 funds have been trading out, and it has been a fairly ruthless process. Having said that, we don’t know for sure what else might be impacting our share price. Any projects, be they REEs, iron ore, potash, etc., that have large cap-ex programs ahead appear to be trading at deep discounts to their projected NAVs. In our case, we are trading at roughly 10% of our NPV(8%). And, amazingly, our stock price ascribes no value whatsoever for our producing gold mine or exploration assets.
Speaking of gold, how important is Alkane’s Tomingley gold mine? Some investors question why you deployed significant cash resources
Well, I guess hindsight is 20/20. Alkane made the go forward decision when the gold price was A$ 400-$500/oz higher than it is today. We delivered that A$110 million project on time and under budget. It came online in February, 2014 and after working out some kinks is now operating at design capacity. In fact, it recently has been producing about 15% above design capacity in both tonnage and at a higher grade. I’m not ready to say that’s sustainable, I want to see the production over the course of a year. We expect this mine has a life of at least 7.5 years that can be stretched to 10-12 years. We project 55k-60k ounces annually from 2015 on at an all-in cost $A 1,000-A$1,100/oz. Given the current gold price, we think we could get up to A$ 400/oz of margin, for cash flow of A$ 20-$ 25 million a year. Further, many of the systems in place are transferable to DZP, such as accounting functions, operating and contract personnel.
Can you describe the Shin-Etsu strategic partnership? Are they an equity holder?
Shin-Etsu is a huge Japanese chemical company with operations all around the world. Important for us, it’s a big magnet manufacturer in Japan. Our agreement with Shin-Etsu is at the MOU stage now, but we’re moving to a commercial relationship within months. Shin-Etsu has the capacity to treat our REEs concentrates and produce separated rare earths. They have the option to purchase any of those rare earths. We will get back the REEs that they don’t need, which we will be free to sell. We didn’t want to put our own separation plant into operation. The technical and financial risk is too high. It would have added an additional A$200mm to the project cost. Shin-Etsu is not an investor at this stage. This is a very important and de-risking arrangement for us, especially as Shin-Etsu will buy from us at commercial pricing levels.
What other off-takes or strategic investors do you have?
This is a work in progress. All of niobium is slated to go into our JV with Treibacher, an Austrian company, to produce a ferroniobium product for direct sale to end users. As a major ferroalloy producer we’re quite pleased with this arrangement. It is forecast to represent approximately 16% of revenues for the project. The only area that’s wide open for us is our zirconium production, but we are in discussions with multiple parties.
Can you comment on the status or timing of other strategic or financial partner discussions?
A lot is going on, we are actively working towards obtaining a strategic partner, probably not this year, but next. We have 2 banks working on funding DZP, Sumitomo Mitsui and Credit Suisse. Export credit agencies, quasi-gov’t entities that many countries have are potential sources of funding. One needs to have some association with that country. With Japan and Shin-Etsu, we have it. Alkane is also looking at European off-takes and possibly even in the U.S. Please note, we’re in early of discussions. An export credit agency could account for 60% of our funding according to our banking syndicate.
Can you describe your demonstration plant? How has that helped the DZP project?
Very, very important, in intermittent operation since 2008. It has proven our flow sheet and continues to allow us to make tweaks. Finished products come out the end. The demonstration plant largely proved the engineering, chemistry, capital and cost estimates. Customers and investors can see it in operation. We’ve made so many improvements to flow sheet, de-risking the project, that even the bankers are happy. It runs batch jobs at 100kg ore per hour. 60 days is the longest run. It will run at 24 hours a day and employ about 30 people. This pilot plant only cost us A$2 million back in 2008. We’ve spent A$8-A$10 million running it over the last 6 years and have made key flow sheet breakthroughs with it.
Alkane’s August corporate presentation does an excellent job of depicting China’s impact on REEs and the outlook for China’s continuing role. What are the key takeaways?
While Japan and Korea and the rest of the world might believe that WTO will change China’s attitude, we don’t believe this will b the case. Our view from people inside of China, is that if they honor the WTO’s request to lower export taxes, they will simply change something else to maintain dominance. By no means does the western world have China on the ropes due to the WTO! Ultimately, we believe that China’s domestic consumption of REEs will rise from 65% to 80% by 2020. This is because China wants to sell the end products, not export the REEs.
Pro forma for Alkane’s mid-June issuance of 40 million shares, how much cash, debt and outstanding shares do you have?
We have 412mm outstanding shares, zero debt, A$20mm cash and we own 3mm shares of Regis Resources, with a market value of close to A$ 5 million. Over the remainder of 2014, we will be free cash flow positive due to our gold operations, we will be building cash. We expect to be able to fund DZP pre-construction activities in the short-term with our gold segment cash flow, without further equity raises, well into next year. By the time we need to do our next equity raise, the DZP project will be greatly de-risked.
How long does that fund you for?
We may not have to go back to market, not until we need the roughly $1 billion of cap-ex for DZP, We think we can get about A$600mm from ECAs, “export credit agencies.” One needs off-take agreements of the country to get these Ex-Im like deals. Possibly another A$100-A$ 200 million from a commercial / strategic partners, for a total of A$700-A$800 million The remaining A$200-A$300 million will come from equity. As I mentioned we don’t believe that we will be required to issue more equity until a lot of de-risking has been completed.
Please briefly describe the prospective economics of the project?
We completed a Definitive Feasibility Study in April, 2013 with $166 million (17% contingencies) built in. We are working on a Bank Feasibility Study that will bring costs down to plus or minus 10%. The DFS project contemplates a 20-year life with open pit mining. The NPV(8%) is A$ 1.2 billion with a 20% IRR.
What are some near-term catalysts to watch for?
Good question. We actually have a number of catalysts over the next 12 months. Approval by NSW of our DPZ project is first. Next, finalizing a commercial off-take with Shin-Etsu. After that, reports form stage 1 of our Front End Engineering and Design work. Those are three important catalysts, there are smaller things as well. For example, if the gold price were to rise by A$ 100, that would be great!
Are there any parting comments for readers?
Yes, I can talk about DPZ for hours. Thank you for your excellent questions. I guess I would like to stress that we’ve been in this region of NSW for over 20 years. We know how to put a mine into production as we’ve done it twice with Peak Hill (1996-2005) and Tomingley. Cash flow from Peak Hill helped fund Tomingley and DZP. Cash flow from Tomingley is helping to fund DZP and prospective exploration efforts. We have a strong management team who have done this all before. We have seen boom and bust cycles. We remain confident that demand for REEs, zirconium and niobium will be strong, not necessarily this year or the year after, but for decades to come. I would argue that the same can not be said of several other commodities. Please keep an eye out for corporate developments.
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