Alkane Resources (ASX:ALK) - Fully-Funded Growth Plan & Exploration Upside for Potential Re-Rating

Interview with Nic Earner, Managing Director of Alkane Resources Ltd.

Our previous interview: https://www.cruxinvestor.com/posts/alkane-resources-asxalk-late-stage-development-gold-producer-targets-100koz-annually-by-2027-5985

Recording date: 5th November 2024

Alkane Resources, an Australian gold producer, presents a compelling investment case based on its strong margins, fully funded organic growth pipeline, and potential for a valuation re-rating. Despite generating robust cash flow and advancing a clear path to increased production scale, Alkane trades at a significant discount to peer companies, offering investors an attractive entry point.

At current gold prices around A$4,000 per ounce, Alkane is generating solid margins with all-in sustaining costs (AISC) of A$2,250 per ounce in the most recent quarter. AISC is expected to drop to A$2,000 per ounce next year as development spending rolls off, further boosting profitability. The company also has a prudent hedging program in place through June 2027, covering 35% of production at an average price of A$2,840 per ounce to protect downside risk while retaining 90% exposure to rising gold prices.

Alkane is investing aggressively in organic growth projects to expand production from around 80,000 ounces currently to a targeted 100,000 ounces per year. Key initiatives include commissioning a paste plant and flotation circuit to improve recoveries, developing the Roswell deposit, expanding the processing plant, establishing open pits at San Antonio with over 180,000 ounces, and ongoing exploration to extend resources.

With A$6 million budgeted for exploration, A$35 million for the plant expansion, and A$50 million for San Antonio, Alkane is fully funded to deliver this growth at current gold prices while still generating a return. The company also sees potential to extend mine life into the early 2030s. Despite this impressive growth profile, Alkane trades at a steep discount to peer companies generating similar levels of cash flow. Managing Director Nick Earner sees a certain inevitability that Alkane will re-rate higher as it demonstrates consistent cash generation.

Beyond the near-term growth pipeline, Alkane offers additional upside potential from accretive M&A to diversify its single-asset risk and increase scale. The company is also starting to contemplate a capital return strategy, which could include dividends and share buybacks, as cash flow ramps up significantly from FY2026 onwards.

The current macro environment appears extremely supportive for gold prices and producers like Alkane. Unprecedented global stimulus, geopolitical tensions, debt accumulation, and the likelihood of a persistently weak U.S. dollar should underpin demand for gold as a safe haven. At the same time, a constrained supply response from gold miners focused more on gaining scale than growing production limits downside risk.

In summary, Alkane Resources offers a timely opportunity to invest in a growing gold producer at an attractive valuation with multiple upside drivers. The company's strong margins, fully funded organic growth, exploration potential, and optionality for M&A and capital returns position it well to deliver value to shareholders. As Alkane demonstrates its cash generation potential, the current valuation discount to peers appears likely to close, rewarding investors.

View Alkane Resources' company profile: https://www.cruxinvestor.com/companies/alkane-resources

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