REPEAT: Alkane Resources Poised For Upside In Rare Earths

This story features ALKANE RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: ALK

Post the publication of the story below, FNArena has been notified by the company 2012's ShinEtsu deal is now out of date and it has been replaced by an agreement with Vietnam Rare Earth to process Alkane's concentrated product into rare earth products. More information about this deal can be found in the company's statement made to the ASX on 7th April 2016. This story has been re-published to include this update.

Hallgarten & Co considers Alkane Resources a survivor of the specialty metals race, with its Tomingley gold mine providing the means to remain in contention.

-Large in-ground resource at Dubbo
-China unlikely to keep defensive pricing
-Two cash options for Tomingley
 

By Eva Brocklehurst

Hallgarten & Co considers Alkane Resources ((ALK)) to be a great survivor of the specialty metals race. Specialty metals and rare earths have registered strong demand and surges in pricing at various times over the last decade and the analysts believe rare earths are likely to move higher in the near future.

The company's cash position at the end of June was $29.8m, which in the analysts' view, makes it one of the most cashed up players in rare earths. The location of the company's Dubbo zirconia project in central NSW involves rare earths, zirconium, niobium and hafnium.

This means the project has potential in high value applications in new and evolving technologies. It is also helpful, the analysts contend, that this is one of the world's largest in-ground resources of rare metals and rare earths.

The mine is expected to process 1m tonnes of ore per year over 70 years or more. Alkane first identified the potential of the Dubbo project in 1999 and remains the only player still in prospect from a group of companies that were advancing rare earths at that stage.

Why? The analysts point to a gold project, Tomingley, in the near vicinity, which was brought into production in 2014 to provide an insurance policy against the notoriously fickle rare earths industry. This has provided cash flow and producer status as well, enabling Alkane Resources to self fund its development in a tough market.

Over-production of rare earths is blamed for the fall in prices from 2011 to the present day, yet there has been little reduction in consumption, Hallgarten observes. China remains the dominant player by a large margin and little new production has been added, which in itself may not even replace those mines China has closed for environmental reasons.

The analysts also discount as myth the story that western demand pushed the prices of the rare earths suite higher in the first place. China's efforts to suppress prices to clear potential competitors out of the segment has largely been successful, they observe, and the number of junior challengers are now few.

The broker initiates coverage on Alkane Resources with a Long strategy and 85c target and a thesis is that China's loss-leading is nearing an end as it cannot afford to undercut pricing any longer. Hence, prices could start moving higher for all rare earth metals, except lanthanum and cerium which remain well supplied.

The question for Hallgarten is whether the threat of several players in the market waiting to flick the “on” switch is great enough to maintain China's defensive pricing. On its calculations the answer is no. Either way, the Chinese will probably raise prices gradually as a means to keep control.

Based on both Hallgarten's and Alkane's 2020 estimates, forecast price uplifts are not ambitious and all prices remain at discounts to the peak years of the rare earths phenomenon.

So, where is the Dubbo project at this stage? A demonstration pilot plant at ANSTO, the research complex on the outskirts of Sydney, has been running since 2008. Alkane published its front end engineering design (FEED) in 2015, which the analysts note contained much of the information normally used in feasibility and scoping studies.

This confirmed the economics of the project, with anticipated product revenue of around US$17/kg and costs of US$8/kg. Where ANSTO has been quite helpful, the analysts maintain, is in improvements and optimisation of the flow sheet, which has delivered a significant reduction in annual water consumption and reduced the site footprint by 50%.

Japan's Shin-Etsu has become a strategic partner in the development of the project with a non-binding memorandum of understanding signed in 2012. Shin-Etsu operates Japan's only large scale separation and refining plant for rare earths. Shin-Etsu would have priority to purchase at commercial prices a quantify of the rare earths that it would process. Obtaining further offtake agreements will be the key, in Hallgarten's view, to moving the financing of the project ahead.

Meanwhile, back at Tomingley, from Alkane pouring its first gold bar in 2014 it is now planning to head underground to access a number of known reserves, the main one being at the Wyoming One pit. Hallgarten notes, originally, many investors thought this operation would fade away as the Dubbo zirconia project ramped up. Now, the analysts suspect that there could be two outcomes, neither of which extinguishes the gold project.

Looking at the company's market cap they suggest there is no credit being given for Tomingley and wonder whether it could be spun out advantageously. It could provide a cash windfall at current gold prices and the low Australian dollar that far exceeds its current cash flow. The second option is that the gold division remains within Alkane and is retained as an internal funding source for building the Dubbo project.

Hallgarten assumes gold production will be around 70,000 ozs in the current financial year. The company also has a history in other gold projects, having discovered the McPhilamys gold project, which was ultimately sold to Regis Resources ((RRL)). There are prospects in the company's armoury in gold and base metals ground in central NSW.
 

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