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Alkane Resources Ltd see chance to lower capital costs by US$450M

Alkane Resources Ltd (ASX:ALK) has conducted an internal review that shows an opportunity to lower initial capital costs at the Dubbo Zirconia Project to US$480 million from US$930 million.

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Alkane's Dubbo Zirconia Project is located 400 kilometres northwest of Sydney

The capital cost reduction would come about through construction on a two-stage modular basis.

By constructing on a modular basis, both costs and site install time would be reduced.

Staged and modular process lessens financial risk and allows the plant to expand as markets are established.

Revised financials will be released following completion of a detailed assessment of this concept in the 2017 March quarter.


Dubbo Zirconia Project (DZP)

The DZP is located 400 kilometres northwest of Sydney and is a large polymetallic resource containing zirconium, hafnium, niobium, yttrium and rare earths.

The project has reserves to support a 35-year mine life and it has a net present value (NPV) of US$0.92 billion and 17.5% internal rate of return (IRR).

The DZP is now construction ready with financing currently in progress with production anticipated to commence in 2018.


Modular and staged construction

A study from 2015 based on 1 million tonnes per annum throughput concluded a capital cost estimate of US$930 million.

A two-stage construction would break up the capital costs into a US$480 for stage 1 and US$360 for stage 2 for a total capital cost of US$840 million. Each stage being 500,000 tonnes throughput.

The difference in cost between the two stages is driven by several factors:

- The building of infrastructure, including the upgrading of Obley Rd, the establishment of power to site, establishment of water to site and waste management infrastructure in the first stage only;
- The increased up-front engineering required to successfully execute a modularisation strategy and
- The decrease in contingency, engineering and management required for the second stage.

A revised financial model, incorporating updated operating costs and revenue streams will presented at the completion of this study, expected before the end of the 2017 March quarter.


Other recent developments

Other recent developments at the DZP include the recently signed memorandum of understand (MOU) with Siemans and a marketing, sales and distribution agreement signed in August 2016.

Alkane signed an exclusive worldwide marketing, sales and distribution agreement with Minchem Ltd for all zirconium materials produced by the DZP.

At full capacity, the DZP will produce zirconium products worth US$100-US$120 million annually.

England-based Minchem is a technical ceramics marketing and manufacturing business that has been involved in zirconium chemicals and zirconium dioxide products for over 40 years.

The five-year agreement will commence upon production from the DZP and an option will exist to extend the term for an additional five years upon mutual agreement.

Alkane also recently signed an MOU with the Australian arm of Siemens AG.

The purpose of the MOU is to advance the DZP with respect to procurement of Siemens equipment and operational solutions and future off-take products.

The MOU is non-exclusive and non-binding for a period of three years.


Analysis

The key opportunity a modular 2-stage construction provides Alkane is the upfront capital cost - rather than jumping straight to 1 million tonnes throughput for US$930 million, it can start with 500,000 tonnes throughput for US$480 million.

While the initial capital cost is significantly decreased, so is the overall capital cost as preliminary estimates suggest the cost of both stages will still cost US$90 million less at US$840 million.

Other advantages include:

- It provides rapid advancement into production;
- It increases the percentage of revenue in the first stage covered by offtake contracts, MOUs and letters of intent;
- It allows a smaller commitment by counterparties that can grow with the project; and
- It allows Alkane to continue to develop and grow the market for its products, once they are successfully proven in the marketplace.

Securing financing for the DZP is a key milestone required by Alkane to unlock the value of the US$0.92 billion project.

The company’s financing strategy targets a combination of export credit agency finance and bank debt.

The DZP has been referred to by market commentators as the most advanced and arguably best rare earth elements and specialty metal project in the world.

The Alkane share price is up 155% year to date trading at $0.60.

Alkane’s gold producing asset, the Tomingley Gold Operations (TGO) continues to provide cash inflow for the company.

Quick facts: Alkane Resources Ltd

Price: 0.62 AUD

ASX:ALK
Market: ASX
Market Cap: $313.78 m
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