Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Alkane Resources Ltd Locks In Gold Hedge At A$1,715 An Ounce

Alkane Resources Ltd (ASX:ALK, OTCQX:ANLKY) has executed initial documentation for a $14 million credit approved loan and hedging facility with Macquarie Bank (ASX:MQG).

The agreement is between Macquarie and Alkane's wholly owned subsidiary, Tomingley Gold Operations Pty Ltd (TGO).

The loan is comprised of a $7 million loan facility and $7 million performance bond facility.

The facility proceeds will be used to complete the definitive feasibility study (NYSE:DFS) for the unground operations at Tomingley, near mine exploration, to repay the existing $4 million facility and provide expanded working capital.

Gold hedge

TGO has also entered into AUD gold forwards for 48,633 ounces at A$1,715 per ounce.

The new forwards, in conjunction with the existing contracts for 24,000 ounces at A$1,618 per ounce, will support 16 months of strong operating cash flows.

Deal conditions

The funding package is subject to conditions precedent customary to a facility of this type.

The gold forwards just executed have led to the satisfaction of one of the key remaining conditions precedent to drawdown for the facility.

There remains a number of specific and customary conditions precedent that require satisfaction to achieve financial close, including finalisation of loan facility documentation.

TGO anticipates achieving financial close in the coming weeks and will inform shareholders of the completion in due course.

The facility will be secured by a general security interest over all of the assets of TGO and supported by a guarantee provided by Alkane.

DZP capital raising

Alkane is in the process of seeking to raise $16 million through a pro-rata non renounceable rights issue to progress the Dubbo Zirconia Project (DZP).

The rights issue will be priced at $0.20 and entitle shareholders to one new share for every five existing shares held.

Over the 9 months to 31 March 2016, $12 million has been expended on development of the DZP which has been funded through cashflows generated from TGO and existing working capital.

Four key parcels of land covering the majority of the project footprint were required to be purchased in 2015/16 financial year, with the acquisition of three parcels completed.

The remaining key parcel to be acquired is to be funded by proceeds of this capital raising.

Alkane's largest shareholder, Abbotsleigh with a circa 22.1% holding, has committed to subscribe for its pro-rata entitlement, provided that the number of new shares it has agreed to subscribe for does not exceed 25.1%.

Analysis

This funding opportunity speaks to the quality of the TGO assets and indirectly signals that Macquarie sees an attractive asset it can reliably do business with.

The additional working capital this loan facility will provide Alkane with the opportunity to expand the TGO mineral inventory and extend the mine life.

By entering into forward gold hedges, TGO is securing its cash flows at a time when gold is trading at near 12 month highs.

TGO forecasts total operating costs to be A$1,250-1,350 per ounce of gold, which leaves a significant profit margin given it has a weighted average forward hedge price of A$1,683 per ounce of gold.

Proactive Investors Australia is the market leader in producing news, articles and research reports on ASX emerging companies with distribution in Australia, UK, North America and Hong Kong / China.