Small Is Beautiful For Alkane Resources, As It Moves Towards Gold Production In New South Wales.
By Our Man in Oz.
“Small is beautiful” is a trendy catchphrase, originally popularised by the late E.F. Schumacher, an economist of some note in the 1960s and 70s. The reason Minesite readers need reminding of Schumacher’s thoughts is that they were developed in difficult times - much the same as now - when small companies can outperform bigger rivals for some unusual and interesting reasons. The latest example of small is beautiful can be found in Alkane Resources, an Australian explorer, which is on the verge of making a return to gold mining, aided by what looks to be a very profitable, albeit small mine, that can be easily funded by a single bank. Why is this important? Because, as Alkane’s chief executive, Ian Chalmers, puts it: “syndicated loans are pretty tricky right now, because there’s no trust between banks, but we’re just the right size for one bank to handle.”
In other words, Alkane has found a silver lining on the global financial crisis. Not only has the company got a project almost ready to go at Tomingley in western New South Wales, but it should find funding the A$50 million development a breeze. The plan is for the production of between 50,000 and 70,000 ounces of gold a year at a cost of around US$520 an ounce, for a minimum of eight years. Not a project to set the gold world alight, Tomingley is nonetheless just the right size for Alkane, and its bank. Profits from the project should run at around US$20 million a year. That should be more than sufficient to fund Alkane’s ongoing interest in other, bigger, developments, such as the promising Dubbo zirconia and rare earths project located not far from Tomingley, and the potential “game changer” in the McPhillamys exploration prospect which Alkane holds in joint venture with one of the world’s biggest gold miners, Newmont.
For patient followers of Alkane, the past few years have been frustrating as the company has come close on several occasions to a development commitment at both Tomingley and Dubbo. But, as the big day neared Ian and his fellow directors pulled back, unconvinced that the numbers were perfectly aligned, or that promises made by potential partners in the Dubbo development were being honoured. However, sometime late last year, after Alkane’s share price had been trashed to as low as A10 cents, optimism re-appeared and the stock began moving on a steady upward trajectory which saw it reach A31 cents a couple of weeks ago, before easing back to around A28 cents.
The real focus, for anyone with an interest in a company with a 29 year record of successful exploration and mine development, should be on Tomingley, Dubbo and McPhillamys rather than on the share price. Of those three it is Tomingley which will return Alkane to the winners circle. Located 14 kilometres from Alkane’s last operating goldmine at Peak Hill, which is itself 400 kilometres west of Sydney, Tomingley consists of a series of orebodies containing a resource of 840,000 ounces of gold. A definitive feasibility study on Tomingley is nearing completion with the formal government approvals process underway. “We’re looking for a decision to proceed by the end of September,” Ian said. “The capital cost we’re targeting is around A$50 million, which is pretty much where it has been for some time. What is interesting on the cost side is the way prices have moved. A year ago, when we were costing major items of equipment, prices were very high. A ball mill, for example, would have cost around A$8 million and taken 150 weeks for delivery. Today, it’s A$4 million and will take 50 weeks for delivery. The price falls are not across the board because steel prices haven’t come down that much, but the big critical items have. It’s much the same with the availability of talented people. The GFC has actually made things easier for us.”
Finding one strip of silver lining on the black cloud of the GFC is rare. Two is akin to hitting the jackpot, but that’s what Alkane has done, as it starts talking to banks about debt funding for Tomingley, and accelerates its currently low-key marketing effort with investors. On the financing, Ian said he had received a very positive response from banks, with all of them saying much the same thing, that money is not an issue. “What we’ll need, around A$50 million, seems to be a nice, round, number,” Ian said. “If you get up around A$100 million the banks start getting twitchy, particularly if they start talking syndication. They still don’t like each other, these banks. At A$50 million, a bank can handle the deal internally.”
As for investors, the Alkane story with its triple-header future plan of Tomingley, Dubbo and McPhillamys, is starting to receive greater acceptance, especially as Tomingley represents the cash flow which will minimise any future capital raising. During a recent visit to Australia’s financial capital of Sydney, Ian found himself answering plenty of questions from stockbrokers keen to re-acquaint themselves with Alkane. “I wasn’t specifically doing the rounds of the brokers but just caught up with a few analysts and found a greatly increased level of interest in Alkane,” Ian said. “They still have difficulty understanding the company with its three major projects, but the message is starting to get across.” Over the next few months, as the Tomingley development decision nears, and the newsflow from Dubbo increases, and Newmont re-starts of drilling at McPhillamys, Alkane can expect to receive even more attention.
ALK Price at posting:
29.0¢ Sentiment: None Disclosure: Not Held
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