Company Overview: Alkane Resources Limited (ASX: ALK) is 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 (ASX: GMD) and ~9.7% of Calidus Resources (ASX: CAI). The company was listed on ASX on 7 October 1980.

ALK Details

Key Takeaways from FY21 Results:

• Completed ASM Demerger: During FY21, the company successfully demerged Australian Strategic Materials Ltd (ASM) and the Dubbo Project, allowing it to consolidate its focus on gold.
• 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.
• 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 $12.8 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. 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.

Gross Margin Trend (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 19.93% of the total shareholding, while the top four constitute the maximum holding. Chapelgreen Pty. Ltd. and Van Eck Associates Corporation are holding a maximum stake in the company at 6.83% and 4.11%, respectively, as also highlighted in the chart below:                    

(Source: Analysis by Kalkine Group)

Growing Mineralised System at Boda: In an exploration update provided on 22 October 2021, the company announced that the drill results from the company’s Boda Prospect have defined several mineralised subvertical and northwest striking, intrusive related-hydrothermal breccias central to the Boda gold-copper porphyry system. The company intends to use these results to plan and deliver the forward drilling program.

Updated Mineral Resources and Ore Reserves: The company has recently updated the Mineral Resources and Ore Reserves for the Tomingley Gold Project. Including the current production facility at the Tomingley Gold Operations, the Roswell and San Antonio deposits and the Peak Hill Gold Project, the total Mineral Resources as at 30 June 2021 stood at 27.01 Mt grading 1.99g/t Au (1,727,000oz) and the total Ore Reserves stood at 11.82 Mt grading 1.86g/t Au (707,000oz).

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.
• Foreign Currency Risk: The company’s sales revenue is largely denominated in the US dollars and the majority of operating costs are denominated in Australian dollars, exposing the company to movement in the A$:US$ exchange rate.

Outlook: Looking ahead, the company is focused on extending the gold mining operations at Tomingley to include the recently defined San Antonio and Roswell deposits immediately south of the existing mine. It is expected that additional resources and reserves at Tomingley has the potential to extend the Roswell underground and maintain production over the FY28 to FY31 period at or near FY25 to FY27 levels, and beyond. For FY22, the company expects its production from Tomingley to be in the range of 55,000oz to 60,000oz at an AISC of $A1,450/oz to $1,600/oz.

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 three months, the stock has been corrected by ~16.82%. The stock has a 52-week low and high price level of $0.655 and $1.395, respectively. The stock has been valued using an EV/Sales multiple based illustrative relative valuation method and 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 OceanaGold Corp (ASX: OGC), Silver Lake Resources Ltd (ASX: SLR), AngloGold Ashanti Ltd (ASX: AGG), and others have been considered. Considering the company’s improved financial performance in FY21, growing Mineralised System at Boda, decent outlook, current trading level, valuation, and key risks associated with the business, we give a “Speculative Buy” rating on the stock at the current market price of $0.90, up by ~1.123% as on 26 October 2021.

ALK Daily Technical Chart, Data Source: REFINITIV 

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

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above. 

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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