A trade spat between China and Japan surfaced in July 2010, when China commenced reducing rare earth exports to its neighbour. China produces around 95% of the world’s rare earths, which is used in a host of products including turbines, consumer electronics such as mobile phones and television screens and even has military applications. During October 2010, the spat escalated as other countries including the United States were drawn in, sending equity traders on a frenzied search for companies with rare earths exposure. This frenzy has highlighted the long term value we see in Alkane as a future alternative rare earths source, as it moves toward production at Dubbo by late 2012. However, share price frenzies provide opportunities to sell and repurchase when calmer waters return.
Looking at the weekly chart of ALK we are struck immediately by the sheer magnitude of the recent move higher. This near parabolic surge higher managed to register a high of $1.19. As is common with such dramatic spikes to the upside they tend to correct sharply rather than consolidate sideways – this case looks set to fit this description.
Members will recall we initiated coverage of Alkane in FAT-MIN-239 with a BUY recommendation and a target price of $0.46. We considered the company was undervalued as it was progressing three projects Dubbo Zirconia, Tomingley and McPhillamy’s. To remind Members Dubbo Zirconia is a rare earths deposit, while Tomingley is a gold deposit and McPhillamy’s is a gold deposit with copper. Alkane recently released its 3Q11 activities report which continues to show a steady path to bringing Dubbo Zirconia into production by late 2012.
Not forgetting the other two projects. At Tomingley where Alkane is in advanced exploration and deposit delineation a definitive feasibility study (DFS) is currently being prepared. While at McPhillamy’s further exploration has identified two major sites of interest being Molong and Moorilda. At this early stage Alkane is progressing Moorilda/McPhillamy’s as its primary focus in the region.
Progress at Dubbo Zirconia to production continues, with the first sample recoveries of yttrium heavy rare earth (YHRE) and light rare earth (LRE) through the demonstration pilot plant during the quarter. The YHRE sample will undergo further processing to develop a marketable product. Additional testing of the LRE sample will be undertaken to determine the ability of the pilot plant to extract LRE. The DFS on the project has yet to be finalised; we however are comfortable with the base case production scenario of 400,000 tonnes pa and also the alternative production being considered of 1.0 million tonnes pa. On a base case scenario the Dubbo Zirconia plant would generate revenue of US$120 million a year and have a mine life of at minimum 200 years. The detail for each production scenario was written up in FAT-MIN-239. The following figure shows the progress being made at Dubbo Zirconia.
Since last reporting to Members on Alkane, apart from progressing Dubbo Zirconia, it has also focussed on the Tomingley gold project. The resource at Tomingley has now been delineated into three deposits (See FAT-MIN-239) with a base case mining scenario prepared and a conceptual mine plan developed. We are comfortable with the base case findings. See the following figure for a brief on the base case scenario.
A DFS is currently being prepared for the project and is expected to be completed shortly. Alkane has also continued to explore the Tomingley site to define further resource. Drilling at Caloma continues to show encouraging results to expand the resource base of Tomingley with showings of 7.1 metres at 12.9g/t gold and 3.0 metres at 5.53g/t gold. Drilling at Caloma Two has also intersected encouraging results the best being 6 metres at 8.07g/t gold. It appears to us the resource base at Tomingley will be expanded as the drilling results are assayed.
Finally, to the McPhillamy’s deposit (Alkane 49% interest) where Alkane has identified two targets Moorilda and Molong. Focus to date has been on Moorilda were drilling has identified an initial resource (at a 0.5g/t gold cut-off); indicated and inferred of 60.9 million tonnes grading 1.32g/t gold (2.7 million ounces) and 0.08% copper (60,000 tonnes). The grade although not as high as those found at Tomingley is made up by the size of the likely resource compared to Tomingley. We are excited about this deposit as it remains open at depth. JV partner Newmont Australia Ltd (Newmont) will advance the project to completion of the bankable feasibility study (BFS) stage and in doing so will increase its interest in the project from 51% to 75%. Newmont will be required to fund all expenditure through to the finalisation of the BFS, proving Alkane with a free ride.
Alkane has other projects which are in embryo stage including Wellington-Galwadgere (copper), Cudal-Bowen Park 1 (gold) and Bodangora-Comobella (gold/copper). Future potential value may be found at these sites; we will therefore monitor progress. We remind Members of Alkane’s current development pipeline in the following figure.
In our opinion the development and exploration profile of Alkane continues to improve. However, the current revaluation frenzy we have seen in the rare earths sector as major countries spat over this mineral group has materialised value to quickly in Alkane. We recommend to Members to SELL HALF the shares they own in Alkane Resources. We will review our recommendation when it is clear the trade spat over rare earths has subsided.
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