Alkane Resources — Management Reports 2010

Sep 15, 2010

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Date of lodgement: 16 September 2010

Title:

“MD Chalmers Updates 3 Major Projects”

Alkane Resouces Ltd

Highlights of interview....

• Rising Product Prices

• Update on 3 Major Projects

• Five year Company Outlook

Record of interview:

companyinsight.net.au

Alkane Resources Ltd (ASX code: ALK; market cap of ~$150m) has previously announced that it has fully reactivated the Definitive Feasibility Study (DFS) for its 100%-owned Dubbo Zirconia Project (DZP). Can you outline the major recent demand/supply events for the DZP’s main products?

Managing Director Ian Chalmers

The rare earths are number one because they’re the products that have captured most people’s attention in the last six months. China produces around 95% of the world’s rare earths and the Chinese Government decided some time ago that they would focus on turning those rare earths into the value added downstream products, such as for applications as in television screens, energy efficient lights, rare earth magnets and rechargeable batteries for use in electric-hybrid cars, rather than exporting the raw product. The restriction in exports of the raw material had a flow-on impact in the supply/demand balance in other major markets such as the U.S., Europe and Japan. It therefore had an impact on the price of rare earths and what we’ve seen in the last few months is some quite amazing increases. The prices for some of the light rare earths have increased by as much as 400% and the heavy rare earths – which I believe are even more limited in supply - have increased by as much as 200%. This, of course, flows on into our potential revenue stream.

The other more subtle market shift has been on the zirconium products we will produce. China is also a dominant player in the downstream zirconium business, producing about 90% of world output. To do that they buy zircon from countries such as South Africa and Australia which have diminishing supply. That combined with the internal demand within China, has meant the zircon market is tightening. There aren’t many new zircon projects coming on-line to replace Iluka’s Western Australian operations and even the new projects such as Iluka’s Murray Basin and South Australian projects won’t be enough to bridge the growing demand/supply shortfall. The zircon price is now up over US$1000 per tonne and our consultants, TZ Minerals International, believe it will be up into the US$1500-1800 per tonne range sometime over the next

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8-10 years. That should increase the price of China’s downstream zirconium products and therefore our zirconium products will also increase in value.

The niobium business is still growing strongly and we don’t expect to see any downward price changes in that market. So, it’s really a number of market factors that are coming together to push up the prices of our products.

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What are the major objectives and hurdles before the expected completion of the DFS in 2011? Do you plan to retain 100% of the DZP?

Managing Director Ian Chalmers

These are more objectives, rather than hurdles. One of the remaining objectives with the process flow sheet is to produce the yttrium heavy rare earths from the Demonstration Plant at ANSTO, which we’re currently doing and the light rare earth component will probably come on-stream before the end of 2010. We’re already marketing the zirconium and niobium products and negotiations for off-take agreements are proceeding with those, and we’ve had a lot of interest in the DZP’s potential yttrium and rare earth output.

We’re already compiling the capital costs and operating costs, and because of the dramatic changes in the rare earths market and the need to prove light rare earth recovery in the DPP, we’ll extend the completion date for the DFS to the June quarter 2011 to ensure we have all the necessary information.

At this stage, Alkane is comfortable continuing with 100% ownership of the DZP because we’re confident we can fund it when we need to, but there is some interest from end users in potentially taking an equity stake in the project. We’re not averse to that second scenario because it will further strengthen the financial position of the holding company.

companyinsight.net.au

What adjustments to the scale of the project might you consider, given the changing demand/supply conditions for your products? For how long will the current Resource underpin that level of production?

Managing Director Ian Chalmers

This time last year, the base case we were considering was 200,000 tonnes per annum of ore throughput, but by the start of 2010 we realised we could sell significantly more zirconium product because the market was expanding. Zirconium output has always been the determining factor of the overall size of the project and we decided it was appropriate to increase our base case to 400,000 tonnes per annum. That gives production of around 6,000 tonnes per annum of zirconia, 2,600 tonnes of rare earths and 2,000 tonnes of niobium concentrate.

With the dramatic changes in the rare earths industry, we’ve also started to consider the possibility of processing 1 million tonnes per annum of ore. That would equate to 6,500 tonnes per annum of rare earths, of which approximately 1,500 tonnes would be yttrium and heavy rare earths, which would probably make us the biggest producer of those products outside China in the near future. The question then would be how we could sell the additional zirconium products and the way to do that could be to have flexibility in the pricing structure, without impacting on the overall revenue stream.

The current Resource would allow us to produce at our base case of 400,000 tonnes per annum of ore per annum for 200 years from an open pit operation and 100 years in the expanded concept. The Resource has never been an issue. The size of the project will be determined by how much product we can sell without impacting on supply/demand.

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What are the potential capital costs, annual revenues and the major product contributors to those revenues? What possibilities are you considering to commercialize the uranium content?

Managing Director Ian Chalmers

The capital cost for the base case was estimated to be about $150 million although that doesn’t include a sulphuric acid plant which could add an additional $20-30 million. We’re beginning to think it would be best to have that acid plant on-site. If we went for the 1 million tonnes per annum scenario, the capital cost would probably be around $300 million, and we would achieve further economies of scale with operating costs.

The revenue for the base case is around US$100-120 million, although this is obviously dependent on individual product pricing. Earlier this year it would probably be split into a third for each of zirconium, niobium and the rare earths but the change in the rare earths markets and pricing could lift the contribution from the rare earths to over 40% of total revenue.

At this stage we don’t have any plans to commercialise the uranium content in the ore as uranium mining is banned in NSW. I’d like to expand on that point though because, interestingly, there still seems to be a perception in the market that we have a uranium problem. We don’t. The uranium gets removed in the flow sheet as part of the refining of the zirconium and is diluted within a solution stream. That stream is then stabilized and dispersed into the residue storage. The ore deposit emits only weak radiation and is not classified in NSW as a radioactive ore. By the time the uranium reaches the residue storage it is even less active due to the dilution of the limestone neutralisation process. The existence of uranium in the ore is definitely not an issue for us.

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You’ve previously stated that you are endeavoring to improve the product quality at the DZP’s Demonstration Pilot Plant. How close are you to producing export market quality for each of your products?

Managing Director Ian Chalmers

We’ve actually done that from the moment the demonstration plant was operating. We produced zirconium and niobium products very early in the demonstration plant run and have successfully modified them for specific end users. The products we have at the moment are export quality but we are always seeking to improve them.

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Can you give an indication of the value of the DZP? What is its significance in a world context?

Managing Director Ian Chalmers

That really is a difficult question to answer. It certainly has strategic value and it will be a major zirconium, heavy and light rare earth producer in the world outside of China.

It’s hard to put a value on the project. Do we run the financial models out to 100 or 200 years? It’s a major project and represents the first of a new generation of rare metal and rare earth producers. When the DFS is finished we can start talking valuations that have some level of credibility.

companyinsight.net.au

You expect the DFS for the Tomingley Gold Project (100%) to be completed soon. What remains to be done? What is the current development concept?

Managing Director Ian Chalmers

We were aiming to finish the DFS by end September, but as we’re now including the Wyoming One underground, that has pushed the DFS out a little. Apart from that, the feasibility is nearly ready to go.

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What are the current project parameters? Where will you use the free cash flow generated?

Managing Director Ian Chalmers

The base case model is a 1 million tonnes of ore per annum, standard carbon-in-leach processing with about 6 years open pit life and another one to two years of underground operation. We’ll recover about 400,000 ounces over a seven-eight year life. It will be about 50-60,000 ounces of production each year.

The capex will be about $90 million, which was a little higher than we expected. The cash costs will be around A$900/oz which is also higher than we would like but we feel that when we go to final tender, it should be possible to bring some costs down. Hopefully the A$ gold price continues to improve and we should have a reasonable operating margin.

The DZP development could take some of the free cash flow, but we also have 3 other very good exploration projects…Cudal, Wellington and Bodangora. All of these are first class exploration projects and could progress towards development in the next 3 to 4 years and funds will be directed to these projects.

companyinsight.net.au

The current total Resource at the TGP is 660,000 ounces. Can you explain the expansion potential for that and when you will begin to prove up additional resources?

Managing Director Ian Chalmers

A positive for Tomingley is the potential to add additional resources. There is Caloma underground, the Caloma Two deposit (which has to be drilled out), the historic underground Myall United mine close by, and other interesting regional targets. We have started a technical review of all the nearby targets, and hopefully can commence testing next year.

So the base case doesn’t look fantastic but the upside is good. I think we’ll end up with a 10-12 year life if we can move it forward in the next twelve months.

companyinsight.net.au

You have previously announced a Resource of nearly 3 million ounces at McPhillamys in the Moorilda Project in the Orange District Exploration Joint Venture (ODEJV – Alkane 49%, Newmont Australia 51% with the option to move to 75%). Can you explain why you believe this project is “low risk” with upside significantly above the 3 million ounces? What is the forward plan?

Managing Director Ian Chalmers

We have defined a 3 million ounce deposit which remains open at depth, plus there are other very interesting regional targets with similar style of mineralization. I believe that a large part of McPhillamys could be open pittable, which is good from an Alkane perspective – how Newmont deals with it is another matter, but they are good operators and I’m sure they will thoroughly review all options.

Newmont have been drilling some deeper holes with a view to investigating the potential to develop block caving mining similar to Newcrest’s nearby Ridgeway and Cadia East operations. Pursuing that concept will need this current round of holes demonstrating continuity to depth of the higher grade core to the deposit.

companyinsight.net.au

To what extent will you be able to share infrastructure for these 3 main projects which you are advancing in the Dubbo region of New South Wales?

Managing Director Ian Chalmers

It’s always been our strategy to focus in the Central West of NSW, in the area around Dubbo and Orange, because the resource potential is there. We will eventually appoint a senior operations management group to look after 2, 3 or 4 mining operations that will be within one and half hour’s driving distance of each other. Apart from the management personnel, there are other potential savings in this type of operating structure.

companyinsight.net.au

What do you believe has started to drive the share price lately? In summary, how do you envisage the project development timetable for Alkane over the next 5 years or so?

Managing Director Ian Chalmers

There is no doubt that the remarkable changes in the rare earth business have had a big impact on the Alkane share price. This has come from within Australia, but there is a lot more awareness from overseas investors now who recognize how advanced the DZP is in the development schedule and its potential to be a significant world yttrium and heavy rare earth producer, as well as a strategically important zirconium producer.

For the gold buffs we also offer the potential from the two advanced gold projects.

The current timetable should see the development decision for Tomingley early next year subject to financing and Development Consent (from the State Government), and hopefully the DZP commitment before the end of 2011. It is hard to make a prediction about McPhillamys at this stage as the timing is very much in Newmont’s court, but we still believe that the strategy of having 2 to 4 mines operating within the next five years remains on track.

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Thank you Ian.

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