Alkane Resources’ (ASX:ALK) margins from gold production at Tomingley are growing, as the price of Australian Dollar Gold reaches circa A$1600 an ounce.
Gold sales from the project surpassed A$100 million in FY15, on the back of 69,600 ounces being produced.
Free cash flow from the Tomingley operations in New South Wales are being allocated to advance the company’s Dubbo Zirconia Project (DZP).
The DZP is the jewel in the crown of the Alkane portfolio, and hosts a very large polymetallic resource of the metals zirconium, hafnium, niobium (tantalum), yttrium and rare earths.
While not as well understood in Australia, metals contained at the DZP are strategically important on a global scale.
The reserve supports 35 year mine life at 1 million tonne ore processing per annum, with a defined resource potentially supporting a significantly longer operation.
We are joined exclusively by Alkane Resources’ managing director, Ian Chalmers, in Proactive Q&A Sessions™.
PROACTIVE INVESTORS: Welcome Ian.
First of all, how has the rise in Australian Dollar Gold to circa A$1600 an ounce impacted the economics of Alkane's producing Tomingley Gold Operations?
Ian Chalmers: The recent increase in Australian Dollar Gold has had a very positive impact, and is adding around A$100 an ounce to the bottom line.
For FY15, Tomingley produced 69,612 ounces - which is within the annual guidance of 65,000 – 75,000 ounces.
Full year sales of 70,734 ounces provided revenues of $101.9 million at an average price of A$1,441/ounce.
How many gold ounces is Tomingley forecast to produce during Financial Year 2016, and what is the expected All-In-Sustaining-Costs (AISC)?
Ian Chalmers: The current projections we have are 60,000 to 70,000 ounces of production in the next 12-months, which is a similar to the previous corresponding period.
We estimate the AISC will be around A$1200 an ounce going forward but will report that with the revised Resource/Reserve statement in a few weeks.
This generates a healthy margin of A$400 an ounce, which would generate A$25 million to $30 million a year in EDITDA.
How will Alkane position the hedge book going forward, and will FY16 see a change to percentage hedged against the percentage poured?
Ian Chalmers: We have targeted around 30% to 40% of annual production as hedging positions.
What we do is, as we go forward and produce gold, depending on the spot price, we sell in to those forwards, and then replace them.
We will continue to replace the forwards, particularly at these high Australian Dollar Gold prices.
The Alkane hedging book is in place to protect any downside risk in the gold price.
At the current production rate, what would Tomingley mine life be?
Ian Chalmers: Currently Tomingley has around a six to seven year life, from where it is today, and that is a mixture of open-cut and underground.
We do believe that if we can expand the underground operations, that we can probably add another two to three years.
Therefore the target is around ten years at 60,000 to 70,000 ounces per annum.
Looking forward, how will Alkane Resources utilise free cash flow from the Tomingley operations?
Ian Chalmers: The key driver of free cash flow over the past twelve months has been to assist the nearby Dubbo Zirconia Project (DZP) with pre-construction costs.
For example, we have allocated the money to the front end engineering design, and for the DZP a lot of marketing and development work.
Hopefully in the next six months a separate funding opportunity will be put into place at the DZP, which then frees up the remaining cash coming out of Tomingley.
We will then re-active some of our exploration efforts, as we have some high quality assets in the region, and we would like to allocate some of the free cash flow to evaluate.
Also, cash coming out of Tomingley will continue to increase our bank balance.
Alkane remains well-funded with a$14.8 million in cash at the end of June 2015, along with A$4.8 million in bullion. The company has no debt.
What initiatives has Alkane recently targeted to advance the DZP?
Ian Chalmers: During the June quarter we conducted marketing of the DZP with follow up visits and meetings covering all of the product outputs.
Meetings were held in Asia, Europe and North America, involving process development, tolling, product off take and financing discussions.
In addition, discussions in Australia took place with several leading international companies interested in product offtake and working with Alkane to maximize value adding of process streams.
The importance of the DZP as a new source of critical metals and oxides is significant to diversify supply, with support coming from companies and governments seeking to reduce dependence from China.
Finally, why should an investor should consider adding Alkane Resources to their portfolio?
Ian Chalmers: The key for Alkane is that it is operating in a low sovereign risk environment, while the margins at Tomingley will continue to grow.
We also have a clear path forward to maximise the application of the cash flows.
Any investment into Alkane needs to take into account that the longer term strategy is on the Dubbo Zirconia Project, which will come on-stream in two or so years’ time.
The combined cash flow from the two projects will be substantial.
This in the future will put Alkane in a position to pay dividends, which is probably three to four years away, but as a long term strategy that is where we believe the company is heading.
PROACTIVE INVESTORS: Thank-you Ian.
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