Alkane Resources: Solid Margins, Fully-Funded Growth Towards Potential Re-Rating

• Alkane Resources is an Australian gold producer generating solid margins and cash flow at current gold prices. With all-in sustaining costs (AISC) of A$2,250 per ounce in the most recent quarter and gold near A$4,000 per ounce, Alkane is enjoying robust profitability.
• The company has a hedge book through June 2027 that isequivalent to ~90% of spot pricing on every ounce produced. Alkane has prudently hedged 35% of production at an average price of A$2,840 per ounce, providing downside protection while still retaining significant exposure to rising gold prices.
• Alkane is investing in growth projects to expand production to 100,000 oz per year and extend mine life into the 2030: Advancing multiple initiatives including commissioning a paste plant and flotation circuit to improve recoveries, developing the Roswell deposit and open pits at San Antonio, and ongoing exploration to extend resources around existing infrastructure.
• Management believes the company is undervalued compared to peers and expects the share price to re-rate higher as cash generation is demonstrated. MD Nic Earner sees "a certain inevitability" that Alkane will re-rate as it proves out its cash flow potential.
• To diversify its single-asset risk and gain the benefits of increased scale, Alkane is interested in accretive M&A opportunities, envisioning script-based transactions as cash flow ramps up significantly from FY2026 onwards.

Alkane Resources, an Australian gold producer, presents a compelling investment opportunity for those seeking exposure to a growing mid-tier miner generating robust margins and cash flow. In a recent interview, Managing Director Nic Earner provided an in-depth look at the company's operations, growth plans, and outlook.

Alkane's Solid Margins and Cash Generation

Alkane is currently producing gold at an annualized run rate of around 80,000 ounces. With all-in sustaining costs (AISC) of A$2,250 per ounce in the most recent quarter, the company is benefiting from strong margins at current gold prices near A$4,000 per ounce.

As per Earner, "margins are very very solid" even with significant development expenditures underway. He noted that AISC should drop to around A$2,000 per ounce next year as development spending rolls off, further boosting margins and cash flow.

Downside Protection from Hedging

While Alkane has given up some upside to the rising gold price, the company has prudently put a hedging program in place to protect downside risk and ensure sufficient cash flow to fund growth. The hedge book, established in early 2023, covers about 35% of production at an average price around A$2,840 per ounce through June 2027.

"Whatever the spot price is, we get about 90% of that when it averages out," explained Earner. "So at A$4,000, we're getting A$3,600 in the hand for that hedge book."

This provides a level of cash flow certainty as Alkane invests aggressively in its expansion plans.

Production Growth and Mine Life Extension

Key to the Alkane investment thesis is the company's potential to grow production to 100,000 ounces per year and extend mine life into the early 2030s. Earner outlined several organic growth initiatives underway:

• Paste Plant and Flotation Circuit: Being commissioned to improve recoveries
• Roswell Deposit: Advancing development to bring new deposit into production
• Expansion of Processing Plant: A$35 million investment to increase throughput
• San Antonio Open Pits: A$50 million to establish open pits with 180,000+ ounces
• Exploration: A$6 million budgeted to extend resources around existing infrastructure

"All of those could slide in if the macro is incredibly tumultuous," said Earner. "But with the current price where it is, the cash flow generation that we get is more than sufficient to pay for that and still get a return."

Interview with Managing Director Nic Earner

Undervalued with Re-Rating Potential

Despite Alkane's strong fundamentals and growth profile, Earner believes the company's valuation does not appropriately reflect its cash generation potential. He sees "a certain inevitability" that Alkane will re-rate higher as it demonstrates consistent cash flow.

"If you look across the ASX, people making 80,000 ounces and all have different projected growth profiles but people generating A$40 to A$100 million free cash, they carry valuations in excess of A$500 million up to A$2 billion," Earner pointed out. "We feel there's a certain inevitability about that for ourselves."

M&A Potential and Capital Returns

Longer-term, Alkane is open to M&A opportunities to diversify its single-asset risk and gain the benefits of increased scale. Earner acknowledged they previously tried to take investments in other small companies without great success but would love to try again, envisioning script-based transactions.

Additionally, with the potential for significant cash generation, especially from FY2026 onwards, Alkane is starting to think about a capital return strategy. While still to be determined, this could involve dividends and buybacks.

"The amount of cash that, if prices stay where they are, that ourselves and other companies will be generating is just going to be phenomenal," said Earner. "And we can see why shareholders want some of that back."

Conclusion

In conclusion, Alkane Resources offers investors a unique opportunity to gain exposure to a growing gold producer with a clear path to increased scale and cash generation. With a significant organic growth pipeline fully funded at current gold prices, the company appears well-positioned to create shareholder value in the years ahead. The potential for a re-rating of the shares, accretive M&A, and capital returns provide additional upside to the investment case.

The Investment Thesis for Alkane Resources

• Strong cash generation at current gold prices with AISC around A$2,000/oz
• Fully funded for organic growth to 100,000 oz/year production and mine life into 2030s
• Significant exploration upside to further extend mine life
• Hedging provides downside protection while retaining 90% upside exposure
• Undervalued relative to peers with potential for share price re-rating
• Potential for accretive M&A to diversify asset base and increase scale
• Opportunity for capital returns to shareholders as cash flow ramps up

Macro Thematic Analysis

The current macro environment appears highly supportive of the gold price and, by extension, gold producers like Alkane Resources. With central banks around the world pursuing unprecedented monetary and fiscal stimulus in response to the COVID-19 pandemic, concerns about currency debasement and rising inflation have driven strong investor demand for gold as a store of value.

Geopolitical tensions, particularly between the U.S. and China, have added to the safe haven demand for gold and appear likely to persist even after the U.S. elections. Longer-term, the massive debt loads accumulated by governments could pressure currencies and drive further demand for hard assets like gold.

The constrained supply response from gold miners, despite the high price environment, should also provide support. Earner pointed out that recent M&A activity has been more focused on gaining scale to improve index positioning rather than increasing production. And many single-asset development projects are struggling to secure financing.

Key Takeaway

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 starting to contemplate a capital return strategy, which could include dividends and share buybacks, as cash flow ramps up significantly from FY2026 onwards.

"Someone has to develop the ounces," said Earner. "We've always thought if you're not prepared to develop the ounces yourself, why would anyone be prepared to buy your ounces?"

In this context, existing producers like Alkane that can deliver incremental production growth funded by internal cash flow are well-placed to benefit from the supportive macro backdrop for gold.

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 with expected cash flow signigficant ramp up sign by FY2026 onwards., the current valuation discount to peers appears likely to close, rewarding investors.