Company Overview: Alkane Resources Limited (ASX: ALK) is engaged in the mining operations at its flagship Tomingley Gold Operation. Besides, it is involved in the exploration and evaluation activities on tenements held by the company and pursuing strategic investments in gold exploration companies. The exploration success of the company includes the landmark porphyry gold-copper mineralisation discovery at Boda in 2019.

ALK Details

Rising Gold Production and Decent LOM to Aid Future Growth: The company is enhancing shareholder value with the help of increased gold production at Tomingley, targeted exploration and development, and cornerstone investments. The company’s investments during the year include 12.7% stake in Genesis Minerals and 9.7% in Calidus Resources. The Life Of Mine plan (LOM) shows Tomingley Gold Operation has mine life to 2031 and planned production of ~745,000 oz, with processing ramping to a 1.5 mtpa. ALK anticipates AISC over the LOM period is A$1,350 to A$1,450 per oz. ALK is focused on becoming a multi-mine producer and is optimistic about its future growth on the back of extensive tenement holding in NSW with strong exploration potential.

Insights of 1HFY22:

• During the half-year ended 31 December 2021, the company produced 29,076 ounces of gold as compared to 27,418 ounces in 1HFY21 at an all-in sustaining cost of $1,606 per ounce.
• The company achieved an increased average sales price of $2,472 per ounce against $2,285 per ounce in 1HFY21. In addition, ALK recorded gold sales of 31,113 ounces as compared to 28,559 ounces in 1HFY21.
• During the half-year, the company recorded a rise of 18% in revenue to $76.91 million on the back of increased gold production and increased gold price during the half-year period.
• ALK posted a profit after tax of $58.23 million as compared to $16.61 million in 1HFY21. As a result, basic eps for the period rose to 9.78 cents per share (cps).
• The company closed 1HFY22 with cash and cash equivalents of ~$37.95 million against ~$18.99 million as on 30 June 2021.

Gold Production & AISC (Source: Analysis by Kalkine Group)

FY21 Financial and Operational Summary: During the year ended 30 June 2021, the company witnessed excellent production and cost performance at the Tomingley Gold Operation (TGO). The growth in bottom line was backed by Tomingley’s performance and the highly successful demerger of Australian Strategic Materials.

Financial Summary (Source: Analysis by Kalkine Group)

Update on Boda Resource Drilling:

• Recently, the company announced that the first stage of resource drilling at Boda is near to completion. The drilling is focused on the higher-grade gold-copper mineralization.
• ALK added that the drilling suggests the higher-grade mineralization at a strike length of 500m that runs about three kilometers.

Top 10 Shareholders: The top 10 shareholders together form around ~44.33% of the total shareholding, while the top 4 constitute the maximum holding. Gandel (Ian Jeffrey) and Van Eck Associates Corporation are holding a maximum stake in the company at ~25.32% and ~3.94%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During 1HFY22, the company recorded a net margin of 75.7% against 25.5% in 1HFY21. In addition, ROE for the period stood at 26.4% against the industry median of 6.6%.

Margin & ROE Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Gold Price Risk: ALK’s operational and financial performance could be affected by the adverse movement in the spot prices of gold as it generates a major portion of revenue from the sale of gold.
• Climate Change Risk: The company’s business could be impacted by an extreme change in climate, which may temporarily pause its operations.
• Regulatory Risk: ALK is exposed to a more complex regulatory environment; any failure in the compliances could lead the business to fines, penalties, etc.

Outlook: For FY22, the company expects TGO to produce gold in the range of 55,000-60,000 ounces (oz), and AISC guidance has been lifted from $A1,500/oz to $1,650/oz because of the potential cost impact of the combined effects of COVID-19 and from heavy rainfall impacting the pit walls and access ramp. Looking forward, the company would be focused on exploration and evaluation activities on existing tenements. In addition, the company would seek opportunities to increase its tenement portfolio with the objective to ensure a pipeline of development opportunities for consideration. The key priorities for FY22 mainly include testing high-grade extensions, near-surface resources and repeat structures at Boda and nearby porphyry targets and early-stage exploration across the greater Boda region (North Molong Porphyry Project).

Key Priorities for FY22 (Source: Analysis by Kalkine Group) 

Valuation Methodology: P/E 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: The stock of ALK has a 52-week low-high range of $0.680 - $1.255, respectively. The stock has been corrected by ~1.84% in the past nine months. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average P/E multiple, considering the COVID-19 uncertainties and other material business risks, etc. For the purpose of valuation, a few peers like Red 5 Ltd (ASX: RED), Dacian Gold Ltd (ASX: DCN), and Northern Star Resources Ltd (ASX: NST) have been considered. Considering the expected upside in valuation, growing production, rising topline and earnings, optimistic long-term outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $1.050, as on 15 March 2022, 10:50 AM (GMT+10), Sydney, Eastern Australia.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

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 on 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 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 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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