With its strong cash position (A$24.5 million at the end of 2016), revenue-generating gold asset not far from Dubbo, and unique track record of delivering test products into markets from a pilot plant that’s been fully operational for eight years, Alkane is a rare entity indeed in a strategic materials sector that has downstream participants longing for secure, high-quality sources of supply.
Having recently delivered a modern mine on schedule and within budget in the tier-one jurisdiction of New South Wales (and with a 20-year history of exploring, operating and rehabilitating sites in the state’s central west), Alkane CEO Ian Chalmers is determined to do the same with the company-making asset that has defined Alkane for nearly two decades, and has attracted strong interest from significant offtake parties such as Siemens and Minchem, and the Vietnam Rare Earth JSE for rare earth separation.
The goal has been made more immediately attainable by the adoption of a new, staged and modular development approach that cuts in half the former capex hurdle of US$970 million. Alkane is working with leading Finnish engineering firm Outotec on optimisation of the design that could also deliver important operating and overall (stage one and two) capital cost reductions.
A 500,000 tonnes per annum start-up production rate – versus the previous 1 million tonnes per annum – pushes out the projected 70-year operating life of a project based on one of the world’s largest in-ground resources of zirconium, hafnium, niobium, yttrium and RE elements.
Chalmers says the proposed US$480 million Dubbo project, with its faster payback prospects, makes it a more digestible proposition for providers of the project-level, Export Credit Agency, bank debt and equity financing mix Alkane is striving for. He concedes the opacity of some RE and ‘high-tech’ metal pricing and markets activates red risk flags, but tolerance is growing as existing supply arrangements mature and the escalating demands of strategic material users become more visible.
“Offtake agreements ultimately drive the financing – the level of financing and the timetable – so we’re putting a big effort into offtake agreements and arrangements,” Chalmers says.
“Apart from building on those existing LOIs and MOUs, we are focussed on securing offtake agreements and joint venture relationships, or technology development relationships. There are a number of those in pipeline at this time.
“It’s difficult to set a precise time on when they will be concluded, but I remain optimistic that by the end of this quarter we should have two-to-three of those in place and by halfway through the year we will have a number in place which will give us the confidence that we are putting away all the offtake agreements and arrangements necessary for financing.
“One of the positives that has come out of this change of development concept, with the staged modular plant, is that it halves the volume of material that we’ve got to put away to generate the revenue. So the progress we’re making on that is pretty good.
“We’ve certainly made a lot of progress on the zirconium; the same with the progress on the rare earths and niobium.
“It is worth understanding, though, that the supply of these commodities has traditionally revolved around short-term agreements. Offtake agreements typically run for six or 12 months, maybe 2-3 years if you are lucky. So that’s one of the complexities we’re dealing with.
“We’re working to educate the banks and financiers and credit agencies that that’s how this works. Sometimes you may not get binding agreements until you’re at a point where you’re starting to produce material that can be certified by the customers. So that demands the right risk management procedure. The banks don’t like that level of uncertainty, but it’s just the nature of the business and we have to live with that.”
Chalmers says Alkane has spent more than 10 years researching and building an understanding of RE and zirconium chemical markets dominated by Chinese producers, and a high-grade network of experienced marketing and business development personnel in Europe, North America and Asia.
“It’s very important for those relationships with key offtake parties to work to have people who do know the business and have been around for a long time,” he says.
Chalmers sees positive portents for zirconium, niobium and key RE pricing needed to elicit new production outside of established oligopolies. Alkane would not be swamping the market with supply in any of its core target product streams.
“We can say we’ll potentially be the single biggest producer of hafnium products and therefore have the ability to be a long term stable and sustainable supplier, which is what the market is looking for,” Chalmers says. Alkane is looking at initially supplying small product volumes and building as the market develops.
“Hafnium is an interesting market because we won’t see some of the key emerging applications for the metal kicking in until that stable source of supply is established and people can see there is a long-term reliable source of hafnium.
“Overall, we feel comfortable putting in [price] escalators in the financial model for all output – small escalators – to give a real valuation on the project.”
Alkane will continue to supply sample products into the market this year – “we have a fairly big program coming up”, Chalmers says – as part of marketing and commercial plant refinement efforts. Prospective customers continued to provide valuable product feedback.
“It really is an iterative process,” Chalmers says.
“With all of these products the consumers must prequalify them before buying long term. So we’ll continue with that prequalification momentum. We’ve been doing that now for three years and we’ll continue to do that throughout 2017 as well.
“Just in the rare earths space – because unlike with the other metals there are still projects pushing forward there – we see that as an important differentiator. We don’t have a situation where we produce a concentrate and cart it off somewhere else to be processed before testing. Our final products are coming out a fully operational, functional pilot plant and I think in that sense we’re a long way ahead of anybody else.”
Sans the weather interruptions that negatively impacted production and free cash flow from Alkane’s Tomingley mine last year, Alkane is expecting a return to the substantial FCF of FY16 over the course of 2017.
That, and positive outcomes from the work Outotec is doing on Dubbo’s detailed design, should see progress being made on the ground at Dubbo from the middle of this year.
Chalmers says work on the proposed modular design is proceeding smoothly toward a June finish. With smaller components, offsite fabrication and easier assembly than the bigger plant first examined, the design could also yield further economic benefits. Scale-up of first-phase Dubbo project would likely occur over 3-4 years from 2020.
“All the permitting is done – there are no outstanding permits,” Chalmers says.
“It’s just down to making sure we have enough offtake in place to guarantee the revenue stream that we need, and financing, and then pressing the go button.”
Alkane Resources – at a glance
HEAD OFFICE: 89 Burswood Road, Burswood, Western Australia, 6100 Australia
Telephone: +61 8 9227 5677
DIRECTORS: John Dunlop, Ian Chalmers, Ian Gandel, Anthony Lethlean
QUOTED SHARES ON ISSUE: 505.2 million
MARKET CAP (at Feb 21, 2017): A$167 million
MAJOR SHAREHOLDERS: Abbotsleigh (Gandel Metals), 22%; Fidelity Group, 7%