JUST over 40 years after the company was listed on the Australian Securities Exchange, Goldman Sachs has decided the time is right to initiate coverage of gold and, more specifically, zirconia/rare earths-developer Alkane Resources. With zircon pricing strong and moves afoot around the world in the rare earths sphere, the timing is unsurprising.
Montreal-based Matamec Exploration signed a deal (non binding!) this week with a subsidiary of Toyota for all the rare earths production from its Kipawa deposit in Quebec, while last week South Korean companies reached an agreement with Frontier Rare Earths with respect to the latter’s South African mine.
Last month the managing director of the New South Wales-focused Alkane, Ian Chalmers, said he was hopeful of having an MOU for the proposed rare earths output from the Dubbo zirconia project – with the zirconia and niobium production already accounted for. Chalmers also indicated the company was hopeful of getting $A300 million in cash for selling a 10% stake in the same project, while post a site visit earlier this month Petra Capital suggested Alkane could receive about $A100 million should it decide to sell its 49% stake in the McPhillamys joint venture (featuring Newmont).
Alkane is aiming to become a miner at two operations before mid-decade, with the 50-60,000 ounce per annum Tomingley gold project targeted to be built over the next year and in production during 2013. Production from the Dubbo zirconia project is currently expected to follow approximately one year later.
Tomingley is forecast to generate cash flow (EBITDA) of about $A250 million at a gold price of $A1700/oz (and operating costs of $A942/oz), which will help Alkane pay for the development of its mainstay Dubbo project. Tomingley will cost about $A95 million to build, with $A45 million of project debt available, and Goldman Sachs expecting $A50 million or so in equity to be raised early in 2012.
Alkane has indicated Dubbo will be a near $A900 million capital development capable of processing one million tonnes pa – with a feasibility to be completed in the first quarter of 2012. How much cash it could potentially spit out isn’t easily discernible in the Goldman Sachs report.
For example, niobium cash costs are put at $US5.60/kg long term (on annual production of 3000t), with Goldman Sachs assuming a $US30/kg price for the metal. This, Goldman Sachs said, meant it would comprise about 23% of the revenue basket at Dubbo.
That suggests the revenue basket will, according to Goldman Sachs, total about $US400 million, with Chalmers/Alkane plumping for about $A500 million based on “conservative pricing”.
The rare earths produced at Dubbo are forecast (by Goldman Sachs) to receive $US73/kg in 2015, with cash costs put at $US21-23/kg, on output totalling about 4000t of rare earths.
As for the zirconia oxide produced at Dubbo, Goldman Sachs appears to be modelling a price somewhere in the order of $US8000/t for the 15,000t to be produced, with cash costs long term of $US2700/t.
Still, forecasting prices that far out for opaque and/or non-market traded commodities is a thankless task. And so while Goldman Sachs is “comfortable” with the overall outlook for the rare earths sector from a producer perspective, it’s not within a bull’s roar of being a one-way bet.
“The experience of the past 18 months indicates forecasting prices in this environment can prove somewhat unrewarding, and in turn highlights a major risk for investors in the rare earths sector,” the investment bank said.
With this as the backdrop, Alkane will be working hard to lock away any debt financing, with Chalmers of the opinion the junior’s equity exposure to Dubbo will be “in the vicinity of $A200 million”.
Unsurprisingly Goldman Sachs is closely keeping tabs on the financing.
“The chosen funding mix may materially alter the overall risks,” Goldman Sachs said. “Too much debt may well increase the overall risks ...
“Likewise the opportunity to introduce a partner into the project level with either offtake or financing obligations may reduce the overall risk of the project.”
The other risk at Dubbo for investors to bear in mind is the processing, notwithstanding Alkane having undertaken some 10 years of test work.
“Whilst there is no new individual new processes being used by Alkane, the combinations and the final process design is unique to the Dubbo orebody,” Goldman Sachs noted. “Alkane have completed both bench scale and pilot plant testing for the process but there remains some scale-up risk and operating risks. In our view the operation of the demonstration plant for extended periods has reduced much of this risk.
“(But) we do not underestimate the risk (of moving from explorer to producer). In the case of Alkane it is compounded by the technical complexity of the process, the requirement to meet a number of specific product qualities and market products for which there is no easy terminal market to either benchmark price or offload excess product.
“Alkane will develop the Tomingley gold project prior to the Dubbo zirconia project, and thus many of the systems, operating procedures and manning issues will have been addressed through this development.
“Further, the locality may make this an attractive (operation) to attract skilled personnel, but there will be some concern there is little other chemical processing in the region.”
Petra, which was the broker this year to an Alkane fund raising, is modelling overall earnings (EBITDA) for the company in 2015of $A364 million, and a net profit (after tax) of nearly $A190 million.
Alkane was capitalised this week at about $A270 million, with cash at the start of the quarter of $A13 million.
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