All fronts moving forward
Alkane Resources Ltd's (ASX:ALK) Q215 quarterly report shows the TGO continuing to produce gold ahead of budget. However, a build-up in bullion held on hand (from 2.6koz in Q1 to 5.6koz in Q2) has negatively affected cash flows, with 16.5koz of gold sold at an average selling price of A$1,426/oz. This compares with gold sales of 23.7koz for Q115 at an average price of A1,407/oz. All-in sustaining costs for Q215 were A$1,116/oz, 28.7% higher than Q115 (A$867/oz) reflecting waste removal and pit wall modifications at Caloma, lower gold production and increased bullion on hand. Although TGO cash flow has been markedly weaker (Q115: A$14.0m, Q215: A$3.2m), Alkane’s liquid assets are maintained q-o-q at c A$34m (including the value of bullion on hand, and the value of its Regis Resources holding).
Positive ROM vs resource reconciliation still present
Since it started operating, TGO ores have continually provided greater gold grades than originally estimated in the reserve. Total gold ounces (Caloma and Wyoming Three pits) are 30% ahead of the original budget ytd. This trend has slowed in the Caloma pit during Q214 and it is not known whether it will pick up again in subsequent quarters. During the quarter Alkane initiated a site review for the TGO, which we expect will involve reassessment of the reserve vs mine plan, a review of the potential to mine resources below all planned pit floors and cost-saving initiatives to further improve gross margins. We note that Alkane’s management successfully operated the nearby old Peak Hill mine through the last downturn of the gold price in the late 1990s, experience we consider should support the current strategic review.
Valuation: Adjusted for TGO data, FY14 results
We adjust our previous A$0.89 valuation for our new FY15 gold price of US$1,285/oz (A$1,626/oz), previously US$1,381/oz (A$1,534), our US$/AU$ forex rate from 0.90 to 0.79, FY14 financial results and Q215 operating data (see Exhibit 1). We also adjust for Alkane’s revised production guidance (see page 2), taking theview that ore and mill head grades will start to converge over H215, resulting in our assumption of c 72koz of gold produced. On this basis, our valuation remains in line at A$0.88, comprising A$0.14 for the TGO, A$0.68 for the DZP, A$0.01 for its Regis Resources shareholding and A$0.05 for its cash.
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