Date : 23/09/2020

Alkane Resources

ASX :

ALK

Market Cap : $863.3 Million

Buy

52 Week Range : $0.465 - $1.54

Share Price : $1.49

A firm with a strong balance sheet but a bit of an inconsistent past performance. It is trading clost to 52-week highs, and we issue a "Hold" recommendation.

Company Analysis

 

Alkane Resources Ltd. (ALK) is a gold production company that has developed a portfolio with multi-commodity explorations. ALK continues to invest and pursue other development opportunities in addition to the Tomingley Gold Operations and Peak Hill Gold Mine that are located in central-western NSW. The firm is also believed to have interests in other gold and copper projects in the region. The list of its current exploration projects is below:

  • Peak Hill (Gold)
  • Northern Molong Porphyry Project (Gold – Copper)
  • Rockley (Gold)
  • Cudal (Base Metals – Gold)
  • Wellington (Copper – Gold)
  • Tomingley Gold Project (Gold)
  • Elsienora (Gold – Base Metals)
  • Armstrongs (Gold)
  • Trangie (Nickel – Copper, Cobalt, Titanium & Rare Earth)
  • Leinster Regional Joint Venture (Nickel – Gold)

Alkane Resources is also an investor in gold mining projects that are run by junior companies. The firm primarily looks for high potential exploration projects that require short-term funding, invests in them with an aim to mutually benefit from the partnership.

Currently, Alkane has two such investments:

  • Calidus Resources Limited – A gold exploration company that operates in the Pilbara Goldfields, WA. Alkane holds a 13% stake in the firm and provides expertise along with funding.
  • Genesis Minerals Limited – Alkane is set to become the largest stakeholder in Genesis following a $6m investment in its Gold business.

Tomingley Gold Operations commenced in 2014 and is the firm’s largest project. Tomingley has 4 gold deposits – Wyoming One, Wyoming Three, Caloma, and Caloma Two. In 2019, open cut mining was started that is producing 60,000 – 80,000 ounces of Gold per annum. The total operating capacity of Tomingley is 1Mtpa.

Source: Tradingview.com

The stock price recovered fairly quickly from the slump in March as gold prices have soared again during a crisis. Currently, it is trading close to its 52-week high that was set just last week.

The stock has been riding on a good financial performance to end the financial year, and recent announcements regarding the Tomingley extension project that is underway at Roswell, San Antonio, and El Paso. The total resource for TGO and Tomingley extension project is coming in at 25.4Mt @ 1.9g/t Au.

Alkane Resources announced the demerger of Australian Strategic Materials at the general meeting earlier this year.

Industry Analysis

Commodity prices move due to supply and demand, and hence the volatility and speculative nature associated with them.

Gold prices are soaring, and hence, companies that rely on gold are doing well. The longer Covid19 affects the world, the higher the demand for Gold. While gold prices are high, gold mining companies generate more revenues due to the higher price. As a result, their EBITDA margins increase as well – slightly inflating the value of the firm during such a crisis.


Source: Tradingview.com

The above chart tracks the spot price of gold in USD. The similarity in the charts between the commodity and ALK share price is high – indicating just how much Gold prices matter to the firm and to the investors turning to safe haven commodities and stocks during uncertainty.

The demand for Gold is expected to sustain early into the next year as more developed economies around the world are affected by the pandemic and enter periods of economic recessions.

Investment Thesis

The Tomingley Gold Operations processing plant was subject to maintenance from December 2019 to February 2020. This has impacted its earnings during FY2020. However, the project is now set to deliver underground stope material and has resumed operations as expected in March 2020. Alkane has also commenced infill resource drilling in San Antonia for 50,000 meters.

Alkane delivered revenues of $72.5m in FY2020 – a $20m decline from 2019. The operating income was $19.6m – a 17% decline from 2019. The poor performance and further dilution of its capital structure meant earnings per share declined to $0.02.

The performance of Alkane in the past has been volatile with ups and down in revenues. The below chart shows us the volatility across important metrics.

FY2018 was Alkane’s most successful year and share prices soared to complement it. FY2020 brings hope to investors as the firm’s gold production capacity is estimated to increase in the coming years. The firm is also in a position to take advantage of the soaring gold prices due to the crisis.

During the last 6 years, the margins have been relatively consistent, and they have increased in 2020 due to higher gold prices. EBITDA margins increase with production capacity and higher gold prices.

Alkane Resources hold $48.3m in cash. With its current liabilities sitting at $40m, the credit default risk is low since the firm has enough cash to cover for any unforeseen circumstances in the short-term. In the long-term, assets exceed liabilities by 5.4x – indicating strong financial health. Historically, the firm has been operating without any long-term debt, and just $4.5m was added in FY2020. These metrics further reduce risks associated with the firm.

A look at the capital structure of ALK shows us just how much equity and debt the firm carries. The firm has been funded by debt to just 2.4%, while the remaining 97.6% is made up of equity.

Recommendation

With favourable macro-economic factors and micro-economic factors, Alkane Resources share price has surged. The recent gold output reports have led the surge. A strong balance sheet indicates good long-term financial health. The negative for ALK is its topsy-turvy past performance if the past is any indication of the future. The stock is also trading at 52-week highs and we issue a “Hold” recommendation to investors already exposed to the stock.

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