Alkane Resources (ASX: ALK, OTCQX:ANLKY) has received a Speculative Buy from Perth broker Hartleys, with a 12-month price target of $0.35.

This provides significant upside from the last traded price of $0.21. The following is an extract from the report.


TGO solid JunQ, delivers within FY16 guidance

Gold production from the Tomingley Gold Operations (TGO) was up 24% in JunQ, delivering FY16 production of 67.8Koz within guidance for 60-70Koz.

Company production guidance for FY17 is estimated to be 65-72Koz (higher than FY16) with cost guidance slightly lower for an AISC range of A$1,200-1,300/oz.

Our revised production target for FY17 is now ~67Koz at AISC of A$1298/oz (lower end). We assume the current open pit operation transitions to a blended underground/open pit operation from late CY17.

JunQ gold production of 18,064oz (up from 14,612oz MarQ) at AISC of A$1,149/oz (down from A$1,358/oz MarQ), better than we forecast and good production results given the higher than anticipated rainfall in the quarter.

The Company achieved FY16 AISC of A$1,256/oz, which higher than A$1,000-1,100/oz LOM guidance range, but again better than we had forecast.

Operational cash flows of ~A$9m (up from ~A$6m), considered a good result despite the impact of weather (higher than average rainfall), which kept overall material movements lower than planned. Gold sales for the JunQ of 17,773oz generating sales revenue of A$29.4m (average gold price A$1,658/oz).

The Company";s hedge book at quarter end was 69.9Koz of gold at a forward price of A$1,690/oz.

Cash end JunQ A$24.5m with bullion of A$5.3m, with a further A$4.1m share entitlement proceeds received in July (current cash and bullion ~A$33m); Debt of A$4m was repaid in the quarter, with a new A$14m facility now in place (currently undrawn).


Maintain Speculative Buy recommendation, price target 35cps

Alkane is currently trading on a spot gold FY17 EV/EBITDA of 2.4x.

Our TGO NPV8 is now ~A$153m (largely due to increased gold price assumptions), implies 31cps value on an undiluted basis (current ordinary shares).

Our current 10cps assigned value includes new equity for the Company";s flagship Dubbo Zirconia Project (DZP) development, which is seen as the key value driver.

We maintain our Speculative Buy recommendation, with an unchanged 12-month price target of 35cps.


DZP construction ready but still needs funding

The Dubbo Zirconia Project (DZP) remains construction ready, but development remains subject to financing.

The demonstration pilot plant trials for the DZP are scheduled to commence in August for additional products for customer certification.

The DZP contains a very large polymetallic resource of zirconium, hafnium, niobium and rare earths which can support a long mine-life (+30 years).

The project financials appear robust (+A$300mpa EBITDA), but the A$1.3b capital cost for construction has substantial funding challenges (key risk).

The Company";s financing strategy targets a combination of Export Credit Agency (ECA) finance and bank debt, with discussions well advanced.

Potential offtake partners for some of the specialty metals are also progressing and could attract a strategic cornerstone investor (at the project level).

First production is still targeted for 2018, but a final funding solution is required.

ALK comments that prices for all DZP products remained flat during the quarter.

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