Alkane: Heading to production in NSW

Interviews

Transcription of Finance News Network Interview with Alkane Resources Limited (ASX:ALK) Managing Director, Ian Chalmers

Clive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me at the Australian Uranium and Rare Earths Conference in Fremantle, Western Australia is Alkane Resources Limited (ASX:ALK) Managing Director, Ian Chalmers. Ian welcome to FNN.

Ian Chalmers: Good morning.

Clive Tompkins: For investors not familiar with Alkane Resources, where do you operate and what’s your focus?

Ian Chalmers: Simplistically we’re focused in the central west of New South Wales, a hundred per cent of what we do is there and we’re a multi-commodity company. So we’ll look at developing anything whether it be gold, base metals, rare metals, rare earths. That’s really what we do.

Clive Tompkins: Thanks Ian. So how long has Alkane Resources been listed and what’s your market cap?

Ian Chalmers: We’ve been around since 1969 and I can say that I haven’t been there all this time, some people might think that’s different, but no.  Our market cap today is about $350 million.

Clive Tompkins: Looking at your projects now Ian, starting with your Dubbo Zirconia Project. What does it contain?

Ian Chalmers: Dubbo Zirconia Project is a very large resource of the metals zirconium, niobium and rare earths, and it’s something that we’ve been working on for many, many years.

Clive Tompkins: Now Dubbo is pretty flat terrain. What is the mineralisation of the area and history of mining in the region?

Ian Chalmers: I’ll start with the last bit first, there is no history of mining in the area. I mean when we get going the Dubbo Zirconia Project will be the first in the Dubbo region, so it’s a first in that sense. The deposit is a very unusual deposit, hence it’s probably never been looked at until we got involved many years ago. And it will be, as I said, a first for the region and first of a number of aspects of what it is, first for the world of what it is as well. So it’s a very unusual deposit and project.

Clive Tompkins: Thanks. So what stage is the project and when do you hope to be in production?

Ian Chalmers: We’re in the final stages of the feasibility. We did a feasibility in 2011 and we’ve ramped it because we’ve ramped up the size of the project, so we’re revamping all the numbers. So that’ll be finished by the end of the year. We’ll also have an EIS (Environmental Impact Statement) lodged with the State Government by the end of the year. And allowing then not a short timetable, but let’s say six to 12 months to get all the process in place, all the financing in place for the project, but let’s say we’re ready to go and start work by the end of next year. That puts us in production in 2015.

Clive Tompkins: Now Ian I see you’ve signed a key off- take agreement with Japan’s Shin-Etsu Chemical. What does it entail?

Ian Chalmers: Yeah, look out of our process our flow sheet currently produces two concentrates in the rare earths department – the light earths concentrate and the heavier earths concentrate. We decided not to go down the path of doing the detailed separation at this stage, because we knew it would take another three years. It adds technical and financial complexity to the project, and we decided two years ago that we’d look for a very competent technical partner that we could work with. Now if you’d asked me two years ago who I would have picked at that stage, it would have been Shin-Etsu. So we’re very, very happy that we have done the deal with them.

And basically what they’ll do is take the two concentrates, do all the separations, so we’ll get a complete suite of separated rare earths. They’ll have a prior opportunity to buy at commercial rates what they want, and then we’ll get back the rest that we can go and sell elsewhere in the world. So fortunately, it gives us a lot of upside in having separated rare earths without the technical and financial risk of adding that to our existing plant.

Clive Tompkins: Very good. So what are the economics of the project NPV (net present value), IRR (internal rate of revenue) etc.?

Ian Chalmers: In the 2011 feasibility numbers, the million tonne a year project which is now what we consider our base case, the NPV came in at $1.2 billion. And that was only based on a 20 year life; I mean the project resource there could last for 100 years. So we’ve just done a financial model of 20 years and IRR, and that’s about 30 per cent. It’s a capital cost of about $900 million, so it’s substantial upfront capital, but the returns on it are so strong that we’d do a payback inside four or five years. So it’s a very good project, a very robust project and certainly something we’re very committed to.

Clive Tompkins: And what’s Alkane’s stake?

Ian Chalmers: 100 per cent, it will remain 100 per cent. Part of the financing that we’re looking at - obviously to raise $900 million is a serious amount of money; we’ve looked at maybe a very small strategic sell down, maybe 10 per cent of the project. And we think we can do that at multiples to MPVs. So if we come out of this with 90 per cent in Alkane, we’ll be very comfortable and we think we can do that - if we want to.

Clive Tompkins: Now to your gold projects Ian, also located in the central west of New South Wales. Can you start by introducing your Tomingley gold project?

Ian Chalmers: Yeah Tomingley is a modest resource, it’s about 800,000 ounces and the in-ground gold grade is about two grams. So it’s sort of an average gold grade for these days. We’ve been working on the project now for about eight or nine years and we are very close to getting State Government approval. I mean the EA (Environmental Assessment) was lodged in May of last year, there’s a rumour that we’ll get it shortly, we’ll get the approval shortly and basically it’s ready to go. We have our finance in place for it; we’ve even been buying a lot of the long lead items. We’ve actually gone and taken a risk and said yes, we’ll get project approval. So things like the bore mill and the water supply will virtually be ready for us once we start construction, so it’s very close to go.

Once we start constructing - 12 months then to get it into operation, so let’s say its August next year before we start producing gold. It’ll be around about a 50,000 to 60,000 ounce a year producer, base case 7.5 years, but we’re also very confident that’ll go out to at least 10 years. And it’s a bread and butter business to us. It doesn’t generate the big numbers like Dubbo does, but $30 million a year cash flow is very good money that goes back into the Company and enables us to keep going, doing all the other good things that we’ve been doing.

Clive Tompkins: Thanks Ian and I see you also have another gold project, a joint venture with Newmont Mining. Can you tell us about that?

Ian Chalmers: It’s part of a thing we call the Orange District Exploration Joint Venture and Newmont farmed into a couple of properties that we have in that area, back in 2006. After a period of four or five years, they earned 51 per cent interest in it by spending money. But out of that came the discovery what we now call the McPhillamys deposit. And McPhillamys probably still represents one of the best greenfields gold discoveries in Australia in the last 10 or so years.

It’s currently a three million ounce resource and when Newmont earned their 51 per cent, they then obviously decided they would take over operatorship/management of it. And they also elected to go to 75 per cent interest by presenting us with a bankable study and a decision to mine. Now there is no timetable on that, they can take 10 years/20 years, it’s up to them. We’re not bothered by that because we think the end result is that we’ll participate or are participating in a major resource, a major gold discovery. And if Newmont decide to put it into production, that’s great for us as well.

Clive Tompkins: Alkane is also active on the exploration front. How much are you spending and where?

Ian Chalmers: OK, so it’s all focused in the central west, I mean that remains the focus of the Company – probably spend somewhere between $2 and $3 million a year, so it’s not a big exploration spend currently. But out of that in the last two years or three years, we’ve made some very interesting discoveries. At a place called Bodangora which is about 40 kilometres north of Wellington, we’ve made what looks like a significant porphyry/copper/gold discovery, some good intersections – a long way to go but it’s a very interesting discovery.

To the south of Wellington we’ve got another project called Galwadgere which is an existing copper resource. And then just to the west of Orange not far from Cadia, we’ve made a discovery of a place called Cudal, which is a very interesting unusual geological setting of gold/zinc mineralisation. Again early stages but very interesting, so we’ll keep pushing on with those projects. You know, the plan is to have a pipeline of developments for ourselves over the next five to 10 years, and we think things like Galwadgere and Bodangora may well start to develop into resources in that next sort of, four or five year timetable.

Clive Tompkins: Now to your financials and strategy. What is your cash position and are you funded for the rest of the year?

Ian Chalmers: Yes in March/April we raised $107 million in the market, so we’re well funded. A lot of that money is allocated obviously towards capital cost of Tomingley. But also is enough to make sure we get Dubbo through this next very important phase of actually being able to make a decision to go. So yes, we’re very well-funded. The capital cost for Tomingley is about $100 million of which we’ve already spent $10or$15 million. So where we go in terms of final bits of financing for that project we’re not sure, except we do have an offer from Credit Suisse for up to $45 million debt facility to go for Tomingley, if that’s what we need. So we’ll weigh that up as we start proceeding with the construction, but overall yes, we’re in a very sound financial position.

Clive Tompkins: Last question Ian. Where would you like to see Alkane Resources by the end of the year?

Ian Chalmers: I would like to see us well and truly in construction at the Tomingley gold project. I’d like to see us have lodged the EIS for Dubbo and be very close to putting the broader financing structure in place for the project. And to continue our exploration effort and to continue to make good discoveries, and as I’ve said, leaning towards that next big cash flow position in about three or four years’ time.

Clive Tompkins: Ian Chalmers, thanks for the update.

Ian Chalmers: Thank you Clive.

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