Company Overview: Alkane Resources Limited (ASX: ALK) is a gold mining company with operations located in central western New South Wales in eastern Australia. The company’s wholly owned subsidiary, Tomingley Gold Operations, has been operating since 2014 and is currently expediting a development pathway to extend the mine’s life beyond 2030. The company has strategic investments in other gold exploration and aspiring mining companies, including ~19.8% of Genesis Minerals Limited (ASX: GMD) and ~9.7% of Calidus Resources Limited (ASX: CAI). The company was listed on ASX on 7 October 1980.

ALK Details

December 2021 Quarter Highlights: During the quarter ending 31 December 2021, ALK witnessed a decent performance from Tomingley Gold operations, despite the challenges associated with COVID-19 outbreak in NSW and very high rainfall in Western NSW.

• From Tomingley Gold Operations, the company reported gold production of 16,935 ounces at site cash costs of A$1,089/oz with an all-in sustaining cost (AISC) of A$1,338/oz.
• Over the quarter, the company sold 17,754 ounces of gold at an average sales price of A$2,475/oz, generating revenue of A$43.9 million.
• During the quarter, the company repaid the debt facility of $20 million with Macquarie Bank. At the end of the quarter, the company had cash, bullion and listed investments of A$118.3 million.

2021 AGM Highlights: On 17 November 2021, the company held its 2021 Annual General Meeting (AGM), wherein the management highlighted that the company is focused on growing its shareholder value through increased gold production at Tomingley and cornerstone investments.

• Exceeded Production Guidance: Due to decent production and cost performance at the Tomingley Gold Operation, ALK reported total gold production of 56,958 ounces at an all-in sustaining cost (AISC) of A$1,320 per ounce. Notably, the FY21 production exceeded the guidance of 50,000-55,000 ounces.
• Completed ASM Demerger: During FY21, the company successfully demerged Australian Strategic Materials Ltd (ASM), allowing it to consolidate its focus on gold. Notably, the company created value of over $1 billion through demerger of ASM.

Key Takeaways from FY21 Results:

• Rise in Sales Revenue: Gold sales for FY21 stood at 55,929 ounces, up from 32,995 ounces reported in FY20. Due to the rise in gold sales, the total sales revenue grew by 76% YoY to $127.8 million.
• Increase in NPAT: For FY21, ALK reported a total NPAT (excluding the ASM business, which was demerged in July 2020) of $55.7 million, up from $12.76 million in FY20.

NPAT Trend (Source: Analysis by Kalkine Group)

Key Metrics: Gross margin for FY21 stood at 48.1%, up from 42.2% in FY20. EBITDA margin for FY21 stood at 55.3%, up from 41.15% in FY20. Net margin for FY21 stood at 26.3%, up from 18.4% in FY20. ROE for FY21 stood at 14.6%, up from 5.5% in FY20. Current ratio for FY21 stood at 1.82x, down from 4.87x in FY20. Debt-to-equity ratio for FY21 stood at 0.05x, lower than the industry median of 0.20x.

EBITDA Margin Trend (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 44.29% of the total shareholding, while the top four constitute the maximum holding. Gandel (Ian Jeffrey) and Van Eck Associates Corporation are holding a maximum stake in the company at 25.32% and 3.99%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)

High-Grade Mineralisation at Boda Prospect: On 17 December 2021, the company announced further high-grade mineralisation at its Boda Prospect in Central New South Wales. Notably, the Gold-copper mineralisation is now outlined over a 3km strike length from Boda Three to Kaiser. The company has planned further drill holes to test the Boda mineralisation footprint for an additional 100 metres to the northwest where visually encouraging mineralisation was intersected.

Key Risks:

• Gold Price Fluctuations: The company is exposed to the risks related to the fluctuations in the price of gold as it could impact its financials.
• COVID-19 Uncertainties: The restrictions associated with COVID-19 lockdowns could disrupt the company’s operations.

Outlook: In FY22, one of the company’s strategic priorities is to test the high-grade extensions, near surface resources and repeat structures at Boda and nearby porphyry targets. From Tomingley operations, the company expects its FY22 gold production to be in the range of 55,000oz to 60,000oz. ALK expects FY22 AISC to be in between $1,500/oz to $1,650/oz. Calidus Resources, which is 9.7% owned by ALK, is currently developing a 100,000oz+ p.a. Au project in Western Australia from its 1,500,000oz resource.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has corrected by ~21.96%. The stock is trading lower than the average 52-week price level band of $0.655 - $1.255. The stock has been valued using EV/Sales multiple based illustrative relative valuation method and has arrived at a target price of a low double-digit upside (in % terms). The company can trade at a slight discount to its peers, considering the challenges associated with the shortage of skilled labour and uncertainties surrounding the COVID-19 pandemic. For the valuation purpose, peers such as SSR Mining Inc (ASX: SSR), Pantoro Ltd (ASX: PNR), Newcrest Mining Ltd (ASX: NCM), and others have been considered. Considering the company’s decent production performance in Q2FY22, improved financial results in FY21, decent outlook, current trading level, indicative upside in valuation, and key risks associated with the business, we give a “Speculative Buy” rating on the stock at the closing price of $0.805, down by ~6.937% as on 25 January 2022.  

ALK Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and is subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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