Alkane Resources — Management Reports 2012

Feb 16, 2012

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Alkane Resources Ltd Date of Lodgement: 17/2/12 Title: “Company Insight – Feedback on DZP & General Update”

Highlights of Interview

• Feedback on Toronto rare earth conference.

• • 60% product off take covered by MOUs for Dubbo Zirconia Project.

• Update on financials for the Dubbo Zirconia Project.

• The importance of Alkane’s two Gold growth projects – Tomingley & McPhillamys.

• • 3 other promising exploration targets. • The growth objective with several development projects & discoveries.

Record of interview:

Al k ane Resou r ces Ltd (A S X code: A LK; mark e t cap of ~$310m) is f o recasting t o be in pro d uction fro m its Du b bo Zircon i a Project ( A LK 100 % ) in 2014, which inc l udes zirco n ium, niobium and L R EE and Y R EE (rare earths) p r oducts. You present e d last wee k at the R E E World’s Technolo g y Metals S ummit 20 1 2 in Toronto. Wha t feedback d id you rec e ive on your Dubbo Zi r conia Proj e ct (DZP)?

Managing Director, Ian Chalmers

It w as quite a n interestin g meeting. I thought o u r message had been a ccepted by North Am e rican inve s tors wit h the progr e ss we hav e made at t he Dubbo Z irconia P r oject (DZ P ), but I m a y have un d erestimate d the co m petition fr o m local companies, a n d it was clear that many people w eren’t aw a re of that p rogress an d the sco p e and quality of the D ZP. So it w as a very w orthwhile trip.

Th e key diffe r entiation t o most ot h er compan i es in the R EE secto r was that we’ve bee n operatin g the de m onstration plant for 4 years now, we’ve se n t product s amples to p otential c u stomers a r ound the w orld and we’re no w in the fi n al stages o f the proj e ct leading to develo p ment. Few of the o ther prese n ting co m panies we r e as advan c ed as that. In fact ve r y few had w orking pr o cess flow s heets for t h eir project s , let alo n e an econ o mic flow s h eet. So it w as great t h at we got t hat messag e across an d we belie v e there has , and wil l be some flow on ben e fit to the s h are price f r om that.

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Yo u mentione d in the D e cember 2 0 11 quarterly report t h at the DZ P remains v ery viabl e even wit h the retr e at of rare earth prices and flatt e ning of th e zircon-zir c onium m a rket in rec e nt months . What is y our cur r ent estima t e of annua l revenue a t the 1mtp a case? W h at are the proportion a l contributions to rev e nue

fro m your pro d ucts? Wi t h sales M O Us signed for zircon i um and ni o bium outp u t, when d o you expe c t to sig n MOUs fo r the light a n d heavy r a re earths?

Ian Chalmers

We are curren t ly revamp i ng the rev e nue numb e rs for the 1mtpa ore c ase. Und e r the initi a l study roughly 40 % comes fr o m zirconi u m, 20% f rom niobi u m, 20% f r om light r a re earths a nd 20% f r om heavy rare ear t hs. I thin k the latest review we’re doing w ill show a fall in the p roportion of light ra r e earths and an inc r ease in th e proportio n in the he a vy rare ea r ths. We m ay use sli g htly more conservati v e number s for zirconium and niobium to reflect the impact of c urrent mar k et conditi o ns on long term price s . Howeve r , the tot a l revenue w ill be rou g hly the sa m e as calcu l ated befor e – US$43 0 million p e r annum – but the pr o duct pro p ortions wi l l be differ e nt.

We have 3 M O Us in place for zirc o nium cov e ring 100% of output and one M OU for ni o bium cov e ring 100% of outp u t. We cou l d have sol d the rare e a rths many times over during the l ast year b u t we’re looking to d o somethi n g more in n ovative with that out p ut along t h e lines of a joint ven t ure or toll treatment a t an exi s ting separ a tion plant f or exampl e . That will generate h igher reve n ue than we planned b ecause we will be p roducing a higher qu a lity and a g reater num b er of indi v idual rare e arth produ c ts. The pr o cessing o f rare ear t hs won’t be in China because it would get caught up in their e x port quota s and that w ould limi t our fle x ibility to s e ll all DZP o utput.

I’m hoping we will finalise an MOU for the rare earths by t h e end of M arch.

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Ha v e these pr i ce move m ents – an d further work on the project – caused yo u to adjus t your fina n cial for e casts for t h e DZP, wh i ch is expe c ted to proc e ss 1 milli o n tonnes o f ore per an n um over a minimum o f 37 yea r s at curre n t Reserves? How co n servative a re your p r ice assum p tions used in your pr o ject mode l ling co m pared wit h current sp o t prices?

Ian Chalmers

Th e current ba s e case ass u mes 1mtp a ore throu g hput, annu a l EBITD A of A$300 million per annum ov e r an init i al 20 year plus mine life with a n IRR of 30% and a n NPV of A$1.2 bill i on. We a re revisin g our fin a ncial model but I don’t expect si g nificant ch a nges to th e se bottom l ine numbe r s.

As I alluded t o before, w e original l y thought o ur pricing was cons e rvative. R ecent mar k et events h ave cau s ed us to r e view those numbers a nd there w i ll be some adjustmen t s. In the D efinitive Feasibility Study fro m Septemb e r 2011 w e were usi n g US$30/ k g for lig h t rare eart h concentr a te and to d ay that has an equ i valent val u e of US$ 6 0/kg, we used US$68 / kg for he a vy rare ea r th concent r ate in Sep t ember, but that wo u ld now be U S$250/k g .

I’m confident o ur estimat e for the he a vy rare ea r th product will rise w h en we revise our pric i ng assump t ions but with Mol y corp’s an d Lynas’s p rojects co m ing on-li n e, prices f or specific light rare earths such as lan t hanum and cerium m a y see furth e r downwa r d pressure , hence we m ay opt fo r a more c o nservative l ight rar e earth pric e .

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A r e presentati v e of the A u stralian C o nservation Foundatio n mentione d a potenti a l issue wit h toxic waste at ano t her project. Will the DZP be producing toxic was t e of any significance and if so , how will you neu t ralize and d ispose of t hat?

Ian Chalmers

It’s an interes t ing questi o n which c omes up r egularly. All rare earth depos i ts have s o me radioa c tive ma t erials whi c h require s pecific m a nagement – I would n ’t actually refer to t h em as tox i c though. All mi n ing operati o ns produc e waste of s ome sort which requir e s manage m ent.

Th e DZP cont a ins low le v els of uran i um and th o rium. Ho w ever, we d on’t conce n trate these at the fron t end of t h e process and they a r e remove d in the pr o duct refini n g stage. T he produc t s we ship t herefore w on’t con t ain uraniu m or thori u m. We n eutralize a n d stabiliz e the waste by the addition of l i mestone. This dec r eases the concentration of ura n ium and t h orium so the waste t hat we di s pose of a c tually has less concentration t han the or e which has been sittin g there for m illions of years. The bulk of th e waste is s a line water which w i ll go to th e tailings pond for eva p oration.

We’re confid e nt that we won’t b e creating any haza r dous mat e rial whic h will req u ire long t erm ma n agement.

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Yo u have a st a ke in one o f Australi a ’s largest r ecent gold discoveries at McPhi l lamys (3 m illion oun c es). Al k ane will h a ve a 25% s take now t h at the ope r ator, New m ont Austr a lia, has el e cted to pr o ceed towa r ds a Ba n kable Feasibility Stu d y (providi n g Newmo n t complet e s that stud y ). Will Newmont c o ntinue to t r y to ext e nd the Resource befo r e the BFS ? Has New m ont indic a ted a timel i ne leading up to and t hen compl e ting the BFS?

Ian Chalmers

Fir s tly, there i s no timeli n e for com p leting a B F S. At thi s stage Ne w mont hav e not been d oing any m ore dril l ing at McPhillamys but they have been d rilling on other join t venture prospects. From wha t we un d erstand, th e y have be e n running developm e nt models on the cur r ent deposi t . New m ont have m any pro j ects to ass e ss around t he world a n d McPhillamys is pr o bably not a high prio r ity at pres e nt, however we ret a in 49% un t il they pre s ent us wit h a BFS an d a decisio n to mine a t which po i nt they wil l move to 7 5%. We have quit e a high va l ue internal l y for that 4 9% and a t some sta g e may see k to monet i se that val u e if Ne w mont don’t have a de v elopment t imetable.

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De v elopment a t the Tomi n gley Gol d Project (6 6 0,000 oun c es) is exp e cted to co m mence in 2013. Can you giv e an update there? W h at about cu r rent expec t ed annual f ree cash fl o w and mi n e life?

Ian Chalmers

We’re workin g through the final a pprovals p rocess wit h the NS W Govern m ent. The Environm e ntal Assessment w e nt on pub l ic display mid Nove m ber until mid Dece m ber. We h ad aroun d 7 submis s ions mainly from G overnment departme n ts and we’ v e submitt e d a respon s e to the D e partment o f Planning and Inf r astructure t o cover those issues. It is now in the ha n ds of the D epartmen t to consid e r the repo r t. I bel i eve they w i ll have a r e sponse by t he end of M arch altho u gh it is al w ays hard t o predict ti m ing.

In t he meanti m e we’re d oing as m u ch as we can to advance the p r oject with o ut having final appr o val. We’ve appoin t ed the proj e ct manage r , Henry K a ye, to ma n age the co n struction a nd will slo w ly gear u p our sta f fing over t h e next fe w months. Henry has been in t h e business for aroun d 40 years and built m any pro j ects throu g hout Australia and overseas, wit h up to $1 b illion value, so it’s a great appo i ntment. W e’re confident the p roject will g o ahead a s it is no m o re contentious than a n y other mi n ing projec t , so we or d ered the ball mill l a st September and it is expected t o be on sit e around S e ptember 2 0 12. The p r oduction w ater bor e is in pla c e and we j ust have t o build a p ipeline for the suppl y of water. We have sent the tender doc u mentation for civil w o rks and w e ’re well a d vanced wit h financing negotiatio n s.

At c urrent gol d prices the TGP shou l d produce f ree cash fl o w of arou n d $35 mil l ion per an n um with a base cas e mine life o f 7.5 year s but we ar e confident we can increase this t o at least 1 0 years wit h near min e site exp l oration.

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What was you r interpreta t ion of the results of t h e reconna i ssance cor e drilling a t Bodangor a , Central W est Re g ion of N e w South Wales (A L K 100%) ? Can y o u explain why you believe t h ere is fu r ther enc o uragemen t for a new p orphyry c o pper-gold complex at Bodangor a ? What do you plan n e xt?

Ian Chalmers

We were reall y encourag e d by the g eology an d the drill r e sults we e n countered during the recent drilling. We reported t h e two dia m ond drill h oles on 1 F ebruary 2012 and the s e have ad d ed to our k nowledge f rom the original d r illing we c onducted i n April 2 0 11. The d rill result s were not earth shattering but m ore im p ortantly ea c h time we drill we ar e very enco u raged by t h e geology u ncovered.

We’re seeing a ll the geol o gical attrib u tes of a p o rphyry sys t em particularly at our main target, Glen Ho l low, inc l uding mon z onite intr u sives, brec c ias and s k arns that h a ve similar geology t o Newcrest’s Cadia re g ion. We’re also seeing native c opper at a b out 400 m e tres vertic a l depth disseminated i n the mon z onite intru s ives and I’ve never seen that b e fore. Th e aim now i s to zero in on the pri m e concentr a tion of metals. We h a ve explor e d only a very small ar e a of wh a t looks to b e a large i n trusive co m plex and i t will take a bit of time.

companyinsight.net.au Wi t h at least t hree proje c ts – two w orld class – approac h ing crucia l stages of developme n t or feasi b ility stu d ies, how will you app r oach fundi n g? What s upport are you seeing after last y e ar’s world debt turmoil?

Ian Chalmers

We have an o f fer from C r edit Suiss e pending G overnment approval f o r the TGP which could get us n e arly hal f the capit a l requirem e nt. We h ave also j u st been o n a road s h ow to Lo n don, New York, Tor o nto, Me l bourne an d Sydney t o explain al l the plann e d develop m ents for t h e Compan y . The rea c tion in Lo n don and New Yor k was very positive. I thought it might be s ubdued be c ause of th e Europea n debt crisi s but the r e is a fair b it of mone y available for quality p rojects. W e’re curre n tly lookin g at the fun d ing options for the TGP and w e hope to a nnounce s o mething i n the next f e w weeks. We will se c ure enoug h funds to b uild To m ingley an d to put in place sufficient work i ng capital to ensure w e comple t e all the p r e-develop m ent wo r k for the D ZP. We h o pe to be i n the same p osition wi t h regard to funding th e DZP dev e lopment a t this tim e next year.

companyinsight.net.au Wi t h 1/ a worl d class zirc o nia projec t ; 2/ a poss i ble world c lass gold p roject at M cPhillamys; 3/ Tomin g ley; and 4/ at leas t three ex p loration pr o jects wit h interestin g drill results, how w ill you ju g gle the gr o wth pip e line? Th e se are all w ithin 100 kilometres of Dubbo , NSW – w ill you continue to e xplore for new dis c overies w h en you hav e all these p rojects to a dvance?

Ian Chalmers

Ye s we will c o ntinue our e xploration effort, although we’r e mindful o f managing our financial and tech n ical res o urces. Th e number o n e short term focus is to get Tomingley into production and that w ill then pr o vide us w ith significant cash f low to advance the o t her projects. DZP w i ll follow on and alth o ugh that i s 2-3 yea r s from c o mmercial p roduction it will be a very bi g cash flo w generato r in a diff e rent leag u e to To m ingley. A s I said bef o re with M c Phillamys, that’s in the hands of N ewmont.

Th e three pri m ary explor a tion proje c ts are Bo d angora, G a lwadgere ( W ellington ) and Cud a l. All are very im p ortant to a d d the next d evelopme n ts to the g r owth pipel i ne. Galw a dgere is th e most adv a nced as it h as a def i ned coppe r -gold reso u rce. It’s n ot a large resource, b ut has goo d upside. W e’ve just completed two mo r e deep dia m ond drill h oles there. Bodango r a looks th e most exci t ing geolog i cally as it h as all the r ight attr i butes to tu r n into a la r ge porphy r y copper-gold compl e x. Cudal i s different a gain in th a t it has un u sual gol d -zinc min e ralization. It is our intention to add these to our project pipelin e and cont i nue to adv a nce the m over the n ext five y e ars.

We believe th e re is so m u ch potenti a l in the C e ntral West of NSW a n d we will continue to concentra t e on developing pr o jects in that region, a d vancing re c ent discov e ries and g e nerating m ore discov e ries rather than usi n g our cas h flow to buy somet h ing in a completely different region. W e have e n ough excellent exp l oration pr o spects aro u nd Dubb o to build a very sign i ficant min i ng compa n y and generate retur n s to sha r eholders.

We don’t believe the curr e nt market c apitalizati o n of Alkane remotely reflects ou r developm e nt projects, our exp l oration pr o jects, the p otential f o r more di s coveries a r ound Dub b o and our overall an t icipated st r ong gro w th in the n ear future.

companyinsight.net.au Th a nk you Ian .

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