Alkane Resources: Adjusted For Year End And Caloma Two

Caloma Two and DZP recoveries increase value
Alkane Resources Ltd, (ALK) has managed to improve metallurgical recoveries at the DZP (with no additional operating or capital cost envisaged), and has released an initial resource for the Caloma Two deposit at the TGP. Together, they increase our fully diluted valuation by 11% from A$1.32 to A$1.47 (using a 10% discount rate and valuation assumptions as detailed later in this report). We believe that Alkane’s progress developing the TGP (currently >85% complete) and commissioning in early CY14 should provide a positive catalyst for the shares as it moves from developer to producer.

The TGP in production in Q314
Alkane will move from developer to producer for the first time since it closed the Peak Hill mine in 2005. The Tomingley Gold Project (TGP) mine plan comprises mining three deposits (Wyoming One, Wyoming Three and Caloma). However, Alkane’s release of an initial resource for Caloma Two should extend (by one year under our assumptions) the TGP’s mine life beyond the current official 7.5 years.

Financing the DZP
With the TGP fully funded and in production in H214 (note Alkane’s new June year end), or January to June of 2014, the focus for Alkane is to secure the A$996.4m required to develop the Dubbo Zirconia Project (DZP). Credit Suisse and Sumitomo Mitsui Banking Corporation have been mandated to progress financing for the DZP (please refer to page 6 for details).

Valuation: Adjusted for year end and Caloma Two
We upgrade our old valuation of A$1.32, comprising A$1.17 for TGP and DZP, plus A$0.15 per share for its Regis Resources shareholding, to A$1.47. Our adjustments are for Alkane’s change of financial year end from 31 December to 30 June, improvements to DZP rare earth element recoveries, and our gold price forecasts (see page 5). We also extend the TGP’s mine life from 7.5 years to 8.5 years to reflect Alkane’s release of an initial mineral resource estimate for the Caloma Two deposit. Our base case valuation is now A$1.47, which comprises A$0.14 for the TGP, A$1.30 for the DZP and A$0.02 for the value of Alkane’s remaining Regis Resources shareholding (errors may occur due to rounding). We expect that commissioning of the TGP in early CY14 will be positive to Alkane’s share price as it moves from development to production. Once in production, the TGP should also provide significant confidence in management’s ability to negotiate the NSW regulatory framework on the permitting and development of mining projects, which should carry over into the eventual development of the DZP in CY15.

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