Alkane Resources Demerger update · Alkane and ASM shares on 30 July implied the crystallisation of...
Transcript of Alkane Resources Demerger update · Alkane and ASM shares on 30 July implied the crystallisation of...
3 September 2020 On 30 July, Alkane achieved its goal of demerging Australian Strategic
Materials (ASM) in order to become a purely gold-focused miner. Since
then, it has announced FY20 results, including an updated reserve &
resource statement and the results of additional drilling at Boda, which
continue to be consistent (in our opinion) with its hosting a multi-million-
ounce gold resource. This note updates our financial forecasts and
valuation in the aftermath of the ASM demerger in particular and also the
material (12.0%) strengthening of the Australian dollar vs the US dollar.
Year end Revenue
(A$m)
PBT*
(A$m)
EPS*
(c)
DPS
(c)
P/E
(x)
Yield
(%)
06/19 94.0 25.4 4.57 0.00 24.9 N/A
06/20 72.5 20.6 2.56 0.00 44.5 N/A
06/21e 105.7 23.5 2.96 0.00 38.5 N/A
06/22e 126.5 27.5 3.46 0.00 32.9 N/A
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.
ASM (Dubbo) demerger dividend
The in specie distribution of ASM shares (incorporating the Dubbo rare earths
project) to Alkane shareholders was completed on 28 July, in the ratio of one ASM
share per five ALK shares. All other requirements having been met, ASM’s first day
of trading was Thursday 30 July. Taken together, the combined value of ‘new’
Alkane and ASM shares on 30 July implied the crystallisation of an immediate
29.5c ASM demerger dividend for Alkane shareholders (note: the gold price fell
US$14/oz that day) – a number that, if anything, has only increased subsequently
as ASM’s fundamental value has increasingly been reflected in its rising share
price.
Reserves expanded and extending
In its updated FY20 reserve and resources statement, Alkane revealed a 1.6Mt
increase in reserves at Tomingley (notwithstanding depletion), which is sufficient to
increase its life to three years from the end of FY20 (even at higher production
rates), with resources potentially able to support production for an additional 6.4
years thereafter. We estimate that Roswell and San Antonio could potentially add
another 15 years to the life of operations and should add circa another nine years.
NB Updated resource statements for Roswell and San Antonio (including resources
in the indicated category) are anticipated in October, as are updated mine plans.
Valuation: 55c confirmed plus up to 70c contingent
Even against the headwind provided by the Australian dollar, our updated valuation
of Alkane nevertheless confirms a value of 21c/share on its Tomingley asset plus
cash (cf 25c previously, but with A$20m having been demerged with ASM). To this
should then be added a further 29c for Alkane’s investments in Calidus and
Genesis and at least 5c for its maiden Roswell and San Antonio resources. To this
total of 55c can then be added up to a further 70c in value from contingent assets
(especially Boda), the final valuation for which will depend on additional, future
exploration success (see Exhibit 15).
Alkane Resources Demerger update
Reborn
Price A$1.14
Market cap A$679m
A$1.3890/US$
Net cash (A$m) at 30 June 2020* 41.7
*Pro-forma post-demerger
Shares in issue 595.2m
Free float 78%
Code ALK
Primary exchange ASX
Secondary exchange OTC QX
Share price performance
% 1m 3m 12m
Abs (17.2) 24.1 173.7
Rel (local) (19.1) 15.8 184.8
52-week high/low A$1.3 A$0.4
Business description
Alkane Resources is an Australian production and
development company. It previously produced
70,000oz of gold per year from the open-pit
operations at its Tomingley gold mine, but is now
transitioning to underground operations and
expects to produce around 47,500oz in FY21.
Next events
Q121 activities & cash-flow reports October 2020
Updated resources October 2020
Updated mine plans October 2020
Annual general meeting November 2020
Analyst
Charles Gibson +44 (0)20 3077 5724
Edison profile page
Metals & mining
Alkane Resources is a
research client of Edison
Investment Research Limited
Alkane Resources | 3 September 2020 2
Recent developments
Since our last note on the company (007 strikes it rich, 23 April), Alkane has announced a number
of developments:
◼ The demerger of the Dubbo project into Australian Strategic Materials (effective July 2020).
◼ Quarterly and FY20 results.
◼ A reserves and resources update.
◼ Additional drilling results at its Boda prospect within the Northern Molong Porphyry Project.
In our last note, of the combined entity, we placed a value of up to 170c on Alkane’s shares,
comprising 25c/share for Tomingley plus cash and 52c for Dubbo. To this was added 14c for its
investments in Calidus, Genesis and Ziron Tech (see our note Genesis of a golden opportunity,
published on 24 September 2019) and at least 6c for its maiden Roswell and San Antonio
resources. To this total of 97c could then be added up to a further 73c in value from contingent
assets, the final valuation for which would depend on future exploration success (see Exhibit 15).
Among other things, this note updates our valuation of Alkane in the wake of the Dubbo/ASM
demerger.
ASM (Dubbo rare earths project) demerger
The in specie distribution and transfer of Australian Strategic Materials (ASX: ASM) shares to
‘Alkane Eligible Shareholders’ and the ‘Sale Agent’ was completed on 28 July, in line with the
timetable detailed in the Demerger Booklet released to the ASX on 17 June 2020. In keeping with
Alkane’s then 595.2m shares in issue at the time of the demerger, the total number of ASM shares
issued was 119.0m – consistent with the stated five for one demerger ratio. All other requirements
for listing having been met, ASM’s first day of trading was Thursday 30 July.
A brief summary of the trading levels of each company in the immediate aftermath of the demerger
is as follows:
Exhibit 1: ASM demerger dividend
Date ALK share price
(A$/share)
ASM share price
(A$/share)
Implied pre-demerger Alkane value
(A$/share)
Wednesday 29 July 1.190 N/A 1.190
Thursday 30 July 1.205 1.400 1.485
Thursday 3 September* 1.140 2.210 1.582
Source: Edison Investment Research, Bloomberg. Note: *The date of writing.
Note that ASM’s share hit a recent (closing) high of A$2.48/share on 24 August.
Tomingley
FY20 results and FY21 guidance
On 25 August, Alkane announced its results to 30 June. While this was prior to the demerger,
Alkane re-formatted its accounts to reflect AMS as a ‘group classified as held for distribution to
owners’, with the main body of the accounts thereby being left to reflect Alkane’s gold operations
and activities alone. Together with the pro-forma information provided in the Demerger Booklet,
published on 17 June, Edison has endeavoured as much as possible to present both the past
operating performance of Alkane, together with its future financial forecasts on the basis of its gold
operations only.
Alkane Resources | 3 September 2020 3
After having upgraded its guidance after a better than expected output in Q120, since Q220 Alkane
left its annual gold production forecast for FY20 unchanged at 30–35koz at an all-in sustaining cost
(AISC) of A$1,250–1,400/oz. In the event, it produced 33,507oz in FY20 at an AISC of A$1,357/oz,
notwithstanding the need to pause processing in December in order to accommodate an extended
maintenance shutdown before restarting in mid-February. Perhaps more significantly, the first
underground stope material was processed during the period, with both grade and metallurgical
recoveries performing as expected, while underground development progressed to schedule.
Alkane has now provided production guidance for FY21 of 45–50koz gold at an AISC of A$1,450–
1,600/oz, which we calculate is consistent with the following operating parameters over the course
of the year and forms the basis of our updated forecasts in Exhibits 3 and 16.
Exhibit 2: Tomingley quarterly operating results, Q120–Q421e
Q120 Q220 Q320 Q420 FY20 Q121e Q221e Q321e Q421e FY21e
Ore milled (t) 289,282 231,493 113,699 204,269 838,743 227,203 227,203 227,203 227,203 908,813
Head grade (g/t) 0.96 1.21 1.83 2.20 1.45 1.86 1.86 1.86 1.86 1.86
Contained gold (g/t) 8,929 9,006 6,690 14,448 39,072 13,587 13,587 13,587 13,587 54,348
Recovery (%) 87.4 88.3 85.6 89.3 88.1 87.4 87.4 87.4 87.4 87.4
Gold poured (oz) 7,497 6,929 5,723 13,358 33,507 11,875 11,875 11,875 11,875 47,500
Gold sold (oz) 6,997 9,143 3,864 12,992 32,995 11,875 11,875 11,875 11,875 47,500
Gold price (US$/oz) 1,474 1,483 1,581 1,713 1,563 1,906 1,919 1,749 1,749 1,831
Forex (A$/US$) 1.4593 1.4627 1.5282 1.5226 1.4932 1.4025 1.3890 1.3890 1.3890 1.3924
Average realised price (A$/oz) 2,151 2,084 2,126 2,327 2,199 2,674 2,665 2,429 2,429 2,549
C1 site cash costs (A$/oz) 1,000 1,024 995 981 997 1,268 1,268 1,268 1,268 1,268
AISC (A$/oz) 1,268 1,441 1,346 1,368 1,357 1,590 1,595 1,588 1,595 1,592
Source: Alkane Resources, Edison Investment Research. Note: Forecast average realised gold price in Q1–Q420 excludes forward sales over 17,770oz at an average price of A$1,836/oz.
Among other things, readers should note Edison’s short-term gold price forecast in Q121 and Q221
and our relatively conservative assumption that it will fall to US$1,749/oz (in real terms) in CY21
coupled with a US$/A$ rate that is lower/stronger (as far as the Australian dollar is concerned) than
at any time since March 2019 (NB this forex rate recorded a recent peak of A$1.7408/US$ on 19
March 2020).
A summary of Alkane’s implied H220 forecast results in the context of recent half-year periods is
provided in the table below. Readers should note the anomaly whereby Alkane’s H119, FY19 and
H120 results were reported with its ASM numbers fully consolidated, but its FY20 results were
reported with ASM reflected as ‘classified as held for distribution to owners’ and/or ‘di scontinued’.
The consequences of this are most obviously apparent in the line items entitled ‘loss after tax from
discontinued operations’. However, this anomaly is not considered material enough to significantly
detract from the overall trends apparent from the figures. Our updated forecasts for FY21, within the
context of our quarterly forecasts, disclosed in Exhibit 2, above, are also provided:
Alkane Resources | 3 September 2020 4
Exhibit 3: Alkane FY20 results vs H119, H220, FY20e and FY21e (A$m, unless otherwise indicated)
H119 H219 H120 H220 FY20e FY20 FY21e
Revenue 52.352 41.643 34.098 38.451 67.338 72.549 105.664
Cost of sales (28.829) (24.827) (16.500) (16.400) (33.054) (32.868) (62.861)
Gross profit 23.523 16.815 17.598 22.051 34.284 39.681 42.803
Other net income 1.759 (1.667) 0.111 (0.201) 1.688 (0.090) (0.090)
Administration expenses (4.797) (2.570) (4.993) (5.276) (11.386) (10.269) (7.367)
Exploration and evaluation expenditure expensed 0.000 0.000 0.000 (0.329) 0.000 (0.329) 0.000
Impairments 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Gain/(loss) on disposal 0.000 0.000 0.000 (0.317) 0.000 (0.317) 0.000
EBITDA/(LBITDA) 20.485 12.579 12.747 15.929 24.586 28.676 35.346
Depreciation (5.990) (1.265) (1.429) (7.722) (3.729) (9.151) (12.480)
EBIT/(LBIT) 14.495 11.314 11.318 8.207 20.857 19.525 22.866
Interest income/(cost) (0.258) (0.161) (0.109) 0.498 0.413 0.389 0.626
Loss after tax from discontinued operations 0.000 0.000 0.000 (0.583) 0.000 (0.583) 0.000
PBT/(LBT) 14.237 11.153 11.209 8.122 21.270 19.331 23.492
Income tax 2.047 0.219 3.743 2.826 6.260 6.569 5.873
Effective tax rate (%) 14.4 2.0 33.4 34.8 29.4 34.0 25.000
Profit/(loss) for the year 12.190 10.934 7.466 5.296 15.010 12.762 17.619
Basic adjusted EPS (A$/share) 0.0241 0.0216 0.0146 0.0091 0.0275 0.0233 0.0296
Source: Alkane Resources, Edison Investment Research
While it can be seen that earnings in FY20 were somewhat below our expectations therefore, it
should be noted that all of the negative variance could be attributed to a materia lly higher
depreciation charge in H220 (largely as a consequence of higher capital expenditure) and that, in
the absence of this item alone, results would otherwise have been better than our expectations,
driven by better revenues and good control of costs.
Tomingley FY20 resource and reserve statements
On 18 August, Alkane reported its updated resource and reserve statement for FY20 (by this time
excluding Dubbo resources). Among other things, the report was significant for showing a material
increase in reserves and resources in both absolute and percentage terms:
Exhibit 4: Tomingley updated FY20 total resource and reserve statement cf FY19
Category Tonnage
(kt)
Grade
(g/t)
Contained gold
(koz)
Category Tonnage
(kt)
Grade
(g/t)
Contained gold
(koz)
FY20 FY20
Measured 2,521 1.8 168 Proven 1,230 1.6 65
Indicated 4,600 2.2 310 Probable 1,737 1.9 109
Inferred 2,328 1.5 132 Possible* 0 N/A 0
Total 9,449 1.9 610 Total 2,967 1.8 176
FY19 FY19
Measured 1,317 1.8 76 Proven 722 0.8 19
Indicated 3,869 2.2 276 Probable 688 3.2 71
Inferred 1,253 1.5 61 Possible* 0 N/A 0
Total 6,439 2.0 407 Total 1,410 2.0 90
Change (units) Change (units)
Measured +1,204 -0.0 +92 Proven +508 +0.8 +46
Indicated +731 -0.0 +34 Probable +1,049 -1.3 +38
Inferred +1,075 -0.0 +71 Possible* +0.0 N/A +0
Total +3,010 -0.1 +203 Total +1,557 -0.2 +86
Source: Alkane Resources, Edison Investment Research. Note: Totals may not add up owing to rounding. *Archaic.
Within the context of having ‘reasonable prospects for eventual economic extraction’, open pittable
resources were restricted by an indicative optimised pit shell estimated at a gold price of
A$2,000/oz (cf A$2,665/oz at the time of writing – see Exhibit 2) with the potential open pittable
component assessed at a 0.5g/t gold cut-off. By contrast, the underground resource is restricted to
material below the current final pit design, below the highest stope level currently designed, with
Alkane Resources | 3 September 2020 5
potential for eventual economic extraction by underground mining methods assessed at a 1.3g/t
cut-off (cf 2.5g/t in FY19). The reported ore reserve is based on the measured and indicated
resources within the defined underground resource base at 1.3g/t, a gold price of A$2,000/oz and
the application of the current site-based mine design. While a portion of the reserve and resource
increase will inevitably have arisen as a result of lowering the underground cut-off grade (and the
increase in both reserves and resources is most apparent underground – see Alkane’s
announcement for full details), a cut-off grade of 1.3g/t at a gold price of A$2,000/oz nevertheless
appears appropriate within the context of Q4 C1 site cash costs of A$62.39/t milled plus an
additional A$24.61/t milled in additional AISC costs.
Full details of the changes in Tomingley’s reserves and resources are available in Alkane’s August
announcement. A comparison of the totals in Exhibit 4 nevertheless demonstrates a 3.0Mt increase
in resources and a 1.6Mt increase in reserves that, at a milling rate of 1.0Mtpa, are capable of
supporting a 1.6 year increase in the life of operations at Tomingley and potentially up to a 3.0 year
increase (excluding depletion and additional exploration at Tomingley’s extension areas such as
Roswell, San Antonio etc – see below).
Whereas Tomingley had sufficient reserves to support operations for 1.4 years from mid -2019
therefore, it now has sufficient reserves to last for 3.0 years from mid-2020 (notwithstanding a year
of mining and processing operations in the interim). Resources could then extend this by an
additional 6.5 years (resources being reported inclusive of reserves; cf 5.0 years in FY19) –
especially given that the average resource grade is higher than the average reserve grade and that
this is especially true in the higher, measured and indicated categories of resources.
As a consequence of these increases, Edison has formally increased its immediate assumed life at
Tomingley from the end of FY22 to the end of FY23.
Roswell and San Antonio resources
The Tomingley Gold Project covers an area of approximately 440km2, stretching 60km north-south
along the Newell Highway from the Tomingley mine in the north, through Peak Hill and almost to
Parkes in the south.
Over the past two years, Alkane has conducted an extensive regional exploration programme with
the aim of defining additional resources that have the potential to be mined either via open pit or
underground methods and fed through the Tomingley gold plant. Note that, to this end, New South
Wales state government approval has already been sought given for an underground exploration
drive from Tomingley to the Roswell deposit, with equipment purchased, personnel recruited and
land acquired to facilitate the rapid development of the project. In general, the programme has
yielded broad, shallow, high-grade intercepts that demonstrate the potential for material project life
extension (subject to resource confirmation, landholder agreements and regulatory approvals).
On 28 January, Alkane reported a maiden inferred mineral resource at Roswell, which is
approximately 3km south of the Tomingley mine and processing facility. The San Antonio deposit is
a continuation of the Roswell mineralised zone to the south of the Rosewood fault and, on 20 April,
Alkane also announced a maiden resource at San Antonio.
Together, the Roswell and San Antonio resources comprise a 14,940kt resource at an average
grade of 1.87g/t, containing 898koz gold. While the tonnage of the maiden resource at the San
Antonio deposit lay between the upper and lower bands of Alkane’s exploration target, the maiden
resource declared at Roswell exceeded its upper bound by 13.2% in terms of tonnage and by
17.4% in terms of contained gold at a 3.7% higher grade (at a cut-off of 0.5g/t).
Alkane Resources | 3 September 2020 6
Exhibit 5: Roswell and San Antonio maiden resources* vs target
Target Actual Uplift of actual vs target
Prospect Bound Tonnage
(kt)
Grade
(g/t)
Contained
gold (koz)
Tonnage
(kt)
Grade
(g/t)
Contained
gold (koz)
Tonnage
(%)
Grade
(%)
Contained
gold (%)
Roswell Upper 6,200 1.90 379 7,020 1.97 445 13.2 3.7 17.4
San Antonio Upper 10,200 2.80 918 7,920 1.78 453 -22.4 -36.4 -50.6
Lower 7,400 2.30 547 7,920 1.78 453 7.0 -22.6 -17.2
Total 14,940 1.87 898
Source: Alkane Resources, Edison Investment Research. Note: *All Roswell and San Antonio resources currently categorised as inferred.
Prior to its announcing the maiden Roswell and San Antonio resources, Alkane’s resources at
Tomingley (TGO) were 6,439kt of ore containing 407koz gold at a grade of 2.0g/t as at end-FY19,
which converted into 1,410kt of reserves containing 89koz gold at a grade of 2.0g/t. As such, the
maiden resources at Roswell and San Antonio more than trebled Alkane’s then gold resource at
Tomingley and, to all intents and purposes, met the lower limit of its exploration target at TGO
including El Paso (see Exhibit 6).
In terms of mine life, at a milling rate of 1Mtpa, Roswell and San Antonio’s resources could
therefore potentially add more than 14 years to the life of Tomingley’s operations. Pro-rata with
Tomingley’s existing reserves and resources ratio, Roswell and San Antonio’s resources could
convert into a reserve of 4.7Mt at 1.78g/t containing 255koz gold and therefore should be sufficient
to support an additional 4.7 years of production. However, a reserve estimate performed solely on
this basis may be unduly conservative. Whereas the Roswell and San Antonio resources are stated
‘pre-mining’, the Tomingley resource reflects a mature mine that has already mined out its open pit
reserves and has started to mine its underground ones. On a similar, pre -mining basis, the resource
at Tomingley was c 921koz, of which c 434koz have now been mined, with 610koz remaining in
reserves (see Exhibit 4) and c 179koz included in the underground mine plan (Edison assumption),
which suggests that a more appropriate conversion factor would be in the order of 60% (c 613/921),
in which case, Roswell and San Antonio’s reserves combined could prove to be in the order o f
9.0Mt, containing 539koz gold at a grade of 1.87g/t, and sufficient to support production for an
additional circa nine years (cf Alkane’s target of 10 years, with exploration still ongoing). Note that
the resources at Roswell and San Antonio will both have to be upgraded from the inferred category
into the indicated category, before they are eligible for conversion into reserves, which is the aim of
ongoing work at both deposits currently, where updated resource reports are expected to be
announced in October.
In our report Gold stars and black holes, published in January 2019, we calculated an average
value of in-situ resources quoted in the Australian market of US$24.08/oz, on which basis we would
value the Roswell and San Antonio deposits (combined) at US$21.6m, or A$30.0m, or 5.0
Australian cents per share.
Exhibit 6 demonstrates the value that Alkane may immediately add to its operations via success at
all of its prospects to the south of Tomingley (ie Roswell, San Antonio and also including El Paso) in
the event that it hits its exploration targets:
Exhibit 6: Alkane exploration targets’ potential value (US$m, A$m, A$/share)
Tonnage
(kt)
Grade
(g/t)
Contained gold
(koz)
Valuation
(US$/oz)
Valuation
(US$m)
Valuation
(A$m)
Valuation
(A$/existing share)
Total* Upper 23,800 2.19 1,678 24.08 40.4 56.1 0.094
Lower 15,800 1.81 920 24.08 22.1 30.8 0.052
Source: Alkane Resources, Edison Investment Research. Note: *Comprises Roswell, San Antonio and El Paso.
These valuations are based purely on the in-situ value of the resources that Alkane is targeting for
delineation. Self-evidently, these valuations are subject to increase to the extent that these
resources are subsequently upgraded to reserves and included in the Tomingley mine plan.
Alkane Resources | 3 September 2020 7
To this end, further drilling is underway at Roswell to reduce the drill hole spacing from a nominal
40m to 20m to convert inferred resources into the indicated and (perhaps) measured categories.
The resource delineated to date is a high-grade, large tonnage zone proximal to the Rosewood
fault in the southern section of the tenement. There is also potential to test the depth extensio ns of
the ore zone, while other exploration targets include the poorly constrained northern zone, where
mineralisation is open to the west and at depth where grade and tonnage potential is on an
improving trend. Some targets will also be tested from underground as the exploration drive from
Tomingley is developed. At the same time, further infill and extensional drilling is underway at San
Antonio with a view to defining both the continuity of the mineralisation to the south and west and
the high-grade zones at depth.
Boda drilling results
On 13 February, Alkane reported the assay results of drill hole KSDD005 at its Boda prospect and,
on 23 March and 22 April, the results of holes KSDD006, KSDD007 and KSDD008 and, on 19 May,
the results of hole KSDD009 (100m to the south of hole KSDD008). The drilling was part of a
5,974m diamond core exploration programme to test the depth and strike extensions to the
porphyry gold-copper mineralisation at Boda, which has now been completed.
Diamond core hole KSDD005 was located 200m vertically below KSDD003 and intersected an
extensive (>700m true thickness) pyrite shell with chalcopyrite dominant core (c 300m thick), which
is characteristic of the upper sections of an alkali porphyry mineralisation system. Litho -
geochemistry conducted on the drill samples also supported this interpretation, displaying a pattern
of outer propylitic and sodic alteration at the top of the hole evolving to a copper rich calc-potassic
core and terminating in a propylitic chlorite and pyrite zone. Holes KSDD006 and KSDD007 were
located 100m to the north and 100m to the south of the mineralisation defined by KSDD003 and
KSDD005, respectively. Hole KSDD008 was located a further 100m to the south of hole KSDD007
and hole KSDD009 a further 100m to the south of hole KSDD008.
A summary of all five holes is as follows:
Exhibit 7: Boda diamond drill hole assay results
From
(m)
To
(m)
Aggregate intercept
(m)
Average gold grade
(g/t)
Average Cu grade
(%)
KSDD005 262.0 1,415.0 720.7 0.45 0.19
KSDD006 105.0 948.0 638.6 0.25 0.13
KSDD007 59.0 1,319.1 1,197.1 0.54 0.25
KSDD008 7.3 973.0 965.7 0.22 0.11
KSDD009 12.0 876.0 315.4 0.21 0.13
Source: Alkane Resources, Edison Investment Research
In general, the holes recorded several significant gold-copper intercepts, within an extensive, low-
grade mineralised shell similar to Cadia East. Note that, for the purposes of Exhibit 7, multiple
intersections have been amalgamated and grades averaged according to the width of the individual
intersections.
In each case, the stratigraphic sequence and the style of alteration and mineralisation was also
reported to bear similarities to sections of the Cadia East deposit. The width of the mineralisation in
hole KSDD007 is interpreted as being the result of the channelling of fluids along margins from
Group 1 monzonites possibly from a deeper causative porphyry source. As well as the potential for
an inner potassic bornite rich core to the system, the deposit remains open both on strike and at
depth.
Alkane Resources | 3 September 2020 8
Northern Molong Porphyry Project background
The Northern Molong Porphyry Project is 100% owned by Alkane, covers c 115km2 of the northern
Molong Volcanic Belt (MVB) and is around 80km to the north-east of its Tomingley Gold Mine, in the
Central West of New South Wales (Exhibit 8).
Exhibit 8: Location of the Northern Molong Porphyry Project (NMPP)
Source: Alkane Resources
To date, Alkane’s drill results at Boda have demonstrated both a similar stratigraphic sequence as
well as style of alteration and mineralisation to Newcrest’s Cadia Province mines 110km to the
south, although it is also more structurally complex. Nevertheless, together, the Cadia Province
mines host a JORC-compliant mineral resource estimate of 36.8Moz Au at a grade of 0.36g/t Au
and 8.2Mt of copper at a grade of 0.25% Cu (see Exhibit 10) plus silver and molybdenum and
produced 843koz of gold last year at an AISC of US$160/oz Au (net of by-product credits).
The NMPP now comprises four exploration licences – Bodangora, Boda South, Kaiser and Finns
Crossing – within which Alkane has defined five magnetic anomalies interpreted to be intrusive
complexes – Kaiser, Boda, Comobella, Driell Creek and Finns Crossing – all within a 15km north-
west to south-east trending corridor (Exhibit 9) and all close to road, rail, gas and water
infrastructure. Importantly, the Boda anomaly correlates with a historical induced polarisation (IP)
survey completed by CRA Exploration (now Rio Tinto) over the Boda Intrusive Complex (BIC),
which showed a strong high chargeable anomaly along the northern edge of the survey area
coincident with the magnetic anomaly. As a result, Alkane has recently completed a 70 line
kilometre IP survey over the 6km strike extensions of the BIC to generate further drilling targets in
the area.
Alkane Resources | 3 September 2020 9
Exhibit 9: Northern Molong Porphyry Project regional geology
Source: Alkane Resources
Four of these targets have now been drill tested: Kaiser, Boda, Comobella and Glen Hollow.
Exploration has identified the margins of major monzonite intrusive complexes that provide the
primary control for porphyry and epithermal mineralisation with significant intersections being
reported along the western margin of both the Kaiser Intrusive Complex (KIC) and the Boda
Intrusive Complex (BIC). Specifically, gold mineralisation has been discovered at Kaiser, Boda and
Glen Hollow (which is part of Comobella).
Analysis and interpretation of Boda drill results
In general, holes KSDD005–7 increased both the grade and width of the porphyry mineralisation
identified by hole KSDD003 (658.8m in aggregate at average grades of 0.41g/t Au and 0.18% Cu),
including the high-grade gold-copper chalcopyrite core. Hole KSDD008 increased the width of the
mineralisation, albeit at a slightly lower (but still consistent) grade.
From the drill hole results a number of observations can be made:
◼ From holes KSDD003, KSDD008 and KSDD009 the vertical depth before mineralisation is
encountered is minimal – that is, the deposit (almost) crops out on surface.
◼ From all holes, mineralisation extends to c 1km in depth.
◼ From all holes, the mineralisation is at least hundreds of metres in width.
In purely empirical terms, using the same methodology as in our last note, the inclusion of hole
KSDD009 in our analysis has caused us to reduce very slightly our assumed dimensions of the
orebody. Nevertheless, the changes involved are small relative to the potential errors in the
analysis, such that we are still happy to state that (given the information available) our best
estimate of the overall size of the Boda deposit is 575–738Mt at an average gold grade of 0.34–
0.35g/t containing 6.4–8.3Moz Au (plus copper) and containing a high-grade pod of in excess of
2.2Moz gold equivalent at a grade above its 3.0g/t cut-off.
Alkane Resources | 3 September 2020 10
Edison’s estimates, derived from data made public by a variety of sources, are provided in the table
below and are also compared with the resources disclosed by Newcrest for Cadia Ridgeway
(underground) and Cadia Province.
Exhibit 10: Edison estimate of the potential size of Boda mineralisation
Source of underlying data Edison Alkane Resources Newcrest
Characteristic (units) Updated
estimate
Prior
estimate
ALK
dimensions
High-grade
pod
Surface
projection
Cadia Valley
Ridgeway
Cadia Ridgeway
underground
actual**
Cadia Province
actual**
Strike (m) 640 712 500 150 250
Average estimated true width (m) 317 353 400 100 150
Estimated area of surface projection (Mm2) 0.238
Average estimated true depth (m) 945 977 1,100 500 945 600
Estimated volume (Mm3) 192 246 220 7.5 225 22.5
Estimated density (t/m3) 3.0 3.0 3.0 3.0 3.0 3.0
Estimated tonnage (Mt) 575 738 660 22.5 675 67.5 150 3,170
Estimated average gold grade (g/t) 0.34 0.35 *0.34 0.52 0.36
Estimated average copper grade (%) 0.17 0.17 *0.17 0.33 0.25
Estimated average gold equivalent grade (g/t) 0.52 0.51 0.52 3.0 0.2 2.0 0.84 0.63
Estimated contained gold (koz) 6,354 8,342 7,215 2,400 36,800
Estimated contained copper (kt) 985 1,285 1,122 480 8,200
Estimated contained gold equivalent (koz) ***9,707 ***12,140 ***11,032 2,170 4,340 4,340 ***4,033 ***64,699
Source: Edison Investment Research. Note: *Edison estimates; **From Newcrest reserve & resource statement, 31 December 2019; ***Conducted at prices of US$6,529/t Cu and US$1,919/oz Au.
Clearly such an estimate is very far from being anything close to JORC code -compliant and
experience would suggest that such estimates have an accuracy of approximately ±75%. However,
the increasing number of results in the region of 6.4–8.3Moz contained gold increases our
confidence that the ultimate resource estimate will be of this order of magnitude. If this does prove
to be the case, then it would suggest a multi-million ounce gold deposit at Boda with a potential
valuation (based on the US$24.08/oz average valuation of in-situ ounces calculated in our report
Gold stars and black holes, published in January 2019) of A$0.36–0.47/share at updated forex
rates and adjusted for the increased number of shares in issue at Alkane (cf 0.55/share previously).
In the meantime, a major reverse circulation (RC) and diamond core drilling programme has been
started in order to further test the high-grade core and larger resource potential at Boda, as well as
other regional targets defined by both the 3D-IP survey and existing Alkane data.
COVID-19
Since February, Alkane has been acting in response to information supplied by state and fede ral
authorities and complying with recommended measures to combat COVID -19. These include
heightened cleaning protocols, social distancing, stringent hygiene practices and health screening.
TGO is a predominantly a residential operation and only personnel and contractors essential to the
safe operation of the mine are permitted on site. All non-essential travel has ceased.
At present, operations continue as planned. However, COVID-19 has the potential to interrupt
operations in the event of any of the following:
◼ despite the extensive measures taken, sufficient employees test positive for COVID -19 and the
majority of any crew is unable to attend while they self-isolate;
◼ despite increasing inventory from suppliers and continuing to liaise closely with them, their
capacity to supply critical parts and reagents is compromised; and/or
◼ the New South Wales State government introduces regulations that inhibit suppliers or
employees from attending beyond a skeleton crew.
Alkane Resources | 3 September 2020 11
Tomingley valuation
As always, our valuation of Tomingley is based on the present value of our forecast life of
operations dividend stream to investors in Alkane as a result of the execution of the Tomingley mine
plans (now shorn of any contribution from Dubbo/ASM) discounted back to present value at a rate
of 10% per year, excluding exploration expenditure.
Relative to our last note, we have now extended our life of operations at Tomingley by one year to
the end of FY23, in line with the life implied by its updated reserve and resource statement
(effective date 30 June 2020 – see Exhibit 4). In the aftermath of the demerger, our valuation of the
dividend stream potentially available to Alkane shareholders from its immediate Tomingley
operations is now A$0.186/share. However, to this must be added the va lue of residual resources at
the end of the life of operations, which we estimate to be 0.4Moz with a current value of US$10.3m
(A$14.3m), or A$0.024/share, to bring our total valuation of Tomingley to A$0.210/share (including
cash). This may be rationalised as our prior valuation of Tomingley (see below) plus cash of
A$0.25/share less A$20m (A$0.034/share) in cash demerged with Dubbo/ASM.
A graph of our expectations for Alkane’s EPS, DPS and valuation from the present to FY23 is as
follows:
Exhibit 11: Alkane life of operations’ forecast EPS and (maximum potential) DPS (A$/share)
Source: Edison Investment Research.
Note that the DPS columns in Exhibit 11 represent theoretical, maximum potential dividends
payable, rather than actual dividends forecast and are used solely for valuation purposes. In reality,
we would expect any dividend that could be payable (in FY21 for example) to instead be re -
invested into the business, either in the form of exploration expenditure or capital expenditure to
develop Alkane’s options at Tomingley further.
The above valuation compares with our pre-demerger valuation (including Dubbo/ASM) of
A$0.77/share (see our note 007 strikes it rich, published on 23 April), of which A$0.25 in value was
accounted for by Tomingley and cash and A$0.52 was accounted for by Dubbo. In that case, the
equivalent graph of our expectations for Alkane’s EPS, DPS and valuation from the present to FY43
was as follows:
-
0.05
0.10
0.15
0.20
0.00
0.02
0.04
0.06
0.08
0.10
2020 2021 2022 2023
A$/shareA
$/sh
are
Basic adj. EPS (LHS, A$/share) Dividends per share (LHS, A$) NPV of DPS (RHS, A$/share)
Alkane Resources | 3 September 2020 12
Exhibit 12: Previous* Alkane life of operations’ forecast EPS and (maximum potential) DPS
(A$/share)
Source: Edison Investment Research. Note: *See our report, 007 strikes it rich, published on 23 April 2020.
Sensitivities
Tomingley mine life
Our current valuation of Alkane is based on the present value of future dividends potential ly payable
to shareholders based on a three-year mine plan. However, Alkane reports that the approval
process with the New South Wales government to allow the development of the San Antonio and
Roswell deposits is ‘well underway’” Extensive consultation has taken place with local landholders
and key government agencies and is in the process of being expanded to the broader community
and stakeholders. At the same time, preliminary pit and underground designs have been prepared,
surveys and testing to prepare an Environmental Impact Statement are underway and affected land
either has been purchased or is under contract.
With the caveat that the exact cost parameters around extending the mine plan at Tomingley into
Roswell and San Antonio are, as yet, unknown, we calculate that, as we increase the life of the
operation, our valuation of the Tomingley portion of the business (based on discounted dividends)
increases as follows:
Exhibit 13: Tomingley and extensions’ valuation sensitivity to mine life increases (Australian cents per share)
Mine life extension
(years)
To end: Valuation Incremental valuation
change
Total valuation change
0 FY23 18.6 u/c u/c
1 FY24 20.7 +2.1 +2.1
2 FY25 24.5 +3.8 +5.9
3 FY26 27.9 +3.4 +9.3
4 FY27 31.1 +3.2 +12.5
5 FY28 33.9 +2.8 +15.3
6 FY29 36.5 +2.6 +17.9
7 FY30 38.9 +2.4 +20.3
8 FY31 41.0 +2.1 +22.4
9 FY31 42.9 +1.9 +24.3
Source: Edison Investment Research
Hence, increasing the life of Tomingley by nine years (ie the same as the amount implied by our
conversion of Roswell and San Antonio resources into reserves on page 6) adds 24.3c to our
valuation cf our 5.0c per share in-situ resource valuation, which approximates to less than two
additional years’ worth of mining (ie below the bottom end of what might reasonably be expected
given historical reserve to resource conversion ratios at Tomingley – see page 6). Note that
updated resource statements for Roswell and San Antonio (including the promotion of existing
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
-0.30
-0.20
-0.10
0.00
0.10
0.20
0.30
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
A$/shareA
$/sh
are
Basic adj. EPS (LHS, A$/share) Dividends per share (LHS, A$) NPV of DPS (RHS, A$/share)
Alkane Resources | 3 September 2020 13
resources from the inferred into the indicated category) are anticipated in October, as are updated
mine plans.
Gold price
As with all gold miners, Edison’s valuation of Tomingley is conducted in real terms at a flat nominal
gold price of US$1,892/oz, which declines (in real terms) to a price of US$1,494/oz in 2025.
Variations from this ‘base case’ scenario are considered in the table below:
Exhibit 14: Alkane Resources’ valuation sensitivity to the gold price (Australian cents per share, unless otherwise indicated)
Gold price change (%) -20% -10% u/c +10% +20%
ALK valuation 12.3 15.5 18.6 21.7 24.9
Valuation change -3.2 -3.1 0.0 +3.1 +3.2
Percent change from ‘base case’ -33.9 -16.7 0.0 +16.7 +33.9
Source: Edison Investment Research.
In the event that the gold price remains at US$1,919/oz in flat real terms (the price at the time of
writing), then our valuation of Alkane (based on the present value of potential dividends payable to
Alkane shareholders) increases by 21.0%, from 18.6 to 22.5 Australian cents.
Combined valuation of Alkane
A summary of our updated valuation of Alkane within the context of all of its assets is as follows:
Exhibit 15: Alkane Resources’ valuation summary (Australian cents per share)
Current Previous*
Asset Existing assets’
valuation
Contingent
assets’ valuation Potential total Existing assets’
valuation
Contingent
assets’ valuation Potential total
Tomingley plus cash 21 21 25 25
Dubbo - - 52 52
Sub-total 21 21 77 77
Investments in Calidus** and Genesis 29 29 14 14
Roswell and San Antonio maiden resources 5 15-24 24 6 10–19 19
El Paso and ongoing TGO exploration 4 4 5 5
Boda exploration 36-47 47 55 55
Total 55 55–75 125 97 70–79 170
Source: Edison Investment Research. Note: Totals may not add up owing to rounding; *Included Dubbo/ASM; **Excludes recent, additional A$3.2m investment by Alkane into Calidus in July 2020 at a share price of A$0.51/share (cf a share price of A$0.56 at the time of writing).
Alkane Resources | 3 September 2020 14
Exhibit 16: Financial summary
A$’000s 2018 2019 2020 2021e 2022e
Year end 30 June
IFRS IFRS IFRS IFRS IFRS
INCOME STATEMENT
Revenue 129,973.6 93,994.9 72,549.0 105,663.8 126,520.8
Cost of Sales
(51,080.9) (53,656.4) (32,868.0) (62,861.1) (76,532.7)
Gross Profit
78,892.7 40,338.5 39,681.0 42,802.8 49,988.1
EBITDA 70,378.7 32,971.7 29,412.0 35,436.0 42,621.4
Normalised operating profit 31,658.3 25,808.8 20,171.0 22,866.2 26,811.5
Amortisation of acquired intangibles
0.0 0.0 0.0 0.0 0.0
Exceptionals
0.0 0.0 0.0 0.0 0.0
Reported operating profit
31,658.3 25,808.8 20,171.0 22,866.2 26,811.5
Net Interest
(579.0) (418.8) 389.0 626.0 677.4
Joint ventures & associates (post tax)
0.0 0.0 0.0 0.0 0.0
Exceptionals
0.0 0.0 (646.0) 0.0 0.0
Profit before tax (norm) 31,079.3 25,390.0 20,560.0 23,492.1 27,489.0
Profit before tax (reported) 31,079.3 25,390.0 19,914.0 23,492.1 27,489.0
Reported tax
(6,919.9) (2,266.1) (6,569.0) (5,873.0) (6,872.2)
Profit after tax (norm)
24,159.4 23,123.9 13,991.0 17,619.1 20,616.7
Profit after tax (reported)
24,159.4 23,123.9 13,345.0 17,619.1 20,616.7
Minority interests
0.0 0.0 0.0 0.0 0.0
Discontinued operations
0.0 0.0 (583.0) 0.0 0.0
Net income (normalised)
24,159.4 23,123.9 13,991.0 17,619.1 20,616.7
Net income (reported)
24,159.4 23,123.9 12,762.0 17,619.1 20,616.7
Basic average number of shares outstanding (m)
506 506 547 595 595
EPS – basic normalised (A$) 0.05 0.05 0.03 0.03 0.03
EPS – diluted normalised (A$) 0.05 0.04 0.02 0.03 0.03
EPS – basic reported (A$) 0.05 0.05 0.02 0.03 0.03
Dividend (A$)
0.00 0.00 0.00 0.00 0.00
Revenue growth (%)
10.3 (-27.7) (-22.8) 45.6 19.7
Gross margin (%)
60.7 42.9 54.7 40.5 39.5
EBITDA margin (%)
54.1 35.1 40.5 33.5 33.7
Normalised operating margin (%)
24.4 27.5 27.8 21.6 21.2
BALANCE SHEET
Fixed assets 138,275.0 172,196.0 129,077.0 136,357.1 133,837.3
Intangible assets
93,136.0 103,894.0 32,745.0 42,745.0 52,745.0
Tangible assets
36,266.0 51,038.0 62,322.0 59,602.1 47,082.3
Investments & other
8,873.0 17,264.0 34,010.0 34,010.0 34,010.0
Current assets 93,306.0 76,501.0 59,096.0 65,176.6 89,436.9
Stocks
19,153.0 4,816.0 7,647.0 4,052.9 4,852.9
Debtors
2,030.0 1,998.0 2,940.0 8,684.7 10,399.0
Cash & cash equivalents
72,003.0 69,582.0 48,337.0 51,767.1 73,513.1
Other
120.0 105.0 172.0 672.0 672.0
Current liabilities (27,430.0) (21,762.0) (14,238.0) (9,979.7) (11,103.4)
Creditors
(9,299.0) (8,007.0) (9,425.0) (5,166.7) (6,290.4)
Tax and social security
(6,929.0) (9,317.0) 0.0 0.0 0.0
Short-term borrowings
0.0 0.0 (2,090.0) (2,090.0) (2,090.0)
Other
(11,202.0) (4,438.0) (2,723.0) (2,723.0) (2,723.0)
Long-term liabilities (13,647.0) (13,059.0) (19,522.0) (19,522.0) (19,522.0)
Long-term borrowings
0.0 0.0 (4,515.0) (4,515.0) (4,515.0)
Other long-term liabilities
(13,647.0) (13,059.0) (15,007.0) (15,007.0) (15,007.0)
Net assets 190,504.0 213,876.0 154,413.0 172,032.1 192,648.8
Minority interests
0.0 0.0 0.0 0.0 0.0
Shareholders' equity 190,504.0 213,876.0 154,413.0 172,032.1 192,648.8
CASH FLOW
Operating cash flow before WC and tax
69,941.3 33,135.8 28,173.0 35,346.0 42,531.4
Working capital
(9,498.0) (5,172.0) (3,481.0) (6,408.9) (1,390.6)
Exceptional & other
1,277.0 1,454.0 3,704.0 0.0 0.0
Tax
(6,919.9) 7,047.9 (249.0) (5,873.0) (6,872.2)
Net operating cash flow 54,800.5 36,465.7 28,147.0 23,064.1 34,268.6
Capex
(9,224.0) (19,621.0) (46,122.0) (9,760.0) (3,200.0)
Acquisitions/disposals
0.0 4.0 (20,068.0) 0.0 0.0
Net interest
(579.0) (418.8) 389.0 626.0 677.4
Equity financing
(5.0) 0.0 39,442.0 0.0 0.0
Exploration and Evaluation
(10,969.0) (11,578.0) (20,132.0) (10,000.0) (10,000.0)
Other
(4,317.0) (7,442.0) (9,522.0) (500.0) 0.0
Net cash flow
29,706.4 (2,590.1) (27,866.0) 3,430.1 21,746.0
Opening net debt/(cash) (41,969.0) (72,003.0) (69,582.0) (41,732.0) (45,162.1)
FX
311.6 169.1 0.0 0.0 0.0
Other non-cash movements
16.0 0.0 16.0 0.0 0.0
Closing net debt/(cash) (72,003.0) (69,582.0) (41,732.0) (45,162.1) (66,908.1)
Source: Company sources, Edison Investment Research. Note: FY18 and FY19 income and cash-flow statements are pro-forma, sourced from Alkane’s Demerger Booklet released to the ASX on 17 June 2020; balance sheet is ‘as reported’ until FY20 at which point ‘group classified as held for distribution to owners’ is removed from the reported figures.
Alkane Resources | 3 September 2020 15
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