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Date : 05/04/2021

Northern Star Resources

ASX :

NST

Market Cap : $11.02 Billion

Dividend Per Share : $0.09

Dividend Yield : 2.95 %

Buy

52 Week Range : $8.99 - $17.03

Share Price : $9.80

NST is a well managed company that is growing organically and via M&As. It is also the best priced blue-chip gold stock on the ASX.

Company Analysis

Northern Star Resources (ASX: NST) is the second largest gold miner in Australia. After its recent merger with Saracen wherein NST acquired 100% of Saracen, Northern Star has grown further in stature. They are a proven performer with data going back years to back up their operation and mining capabilities. Northern Star Resources operates in Western Australia and Northern Territory, Down Under and also in Alaska, USA. Together, they have 4 operating mines where they hold 100% interest in the Western Australian and Alaskan mines and 50% interest in their Northern Territory mine that is being operated as a joint venture.

Northern Star Resources has a very simple business model – they operate 3 large-scale production centres while striving to hit the 2Moz per annum production capacity.

Collectively, with three Tier-1 assets in Tier-1 locations, Northern Star Resources looks exceptionally strong. The post-merger integrations are said to be running ahead of schedule and all their mines have a high life of mine with over 10 years. The growth opportunities are present as well, supported by aggressive explorations. For FY2021, the exploration budget was set at A$150 million.

Northern Star is running a growing business that has falling costs and expanding margins. The firm is targeting a 30% growth in production in the next 3 years alone. They have 3.2 Moz in surface stockpiles and a further M&As to expand further are definitely on the cards.

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Source: Northern Star Resources

Kalgoorlie Operations

Northern Star’s 100% interest in its Kalgoorlie Operations consists of Kanowna Belle, East Kundana, and South Kalgoorlie mine. NST is targeting a production capacity of 1.1 Moz per annum from its Kalgoorlie operations. 300kozpa from Kalgoorlie operations, 250kozpa from Carosue Dam, and 550kozpa from KCGM make up the 1.1 Moz target. The metrics from the production centre for FY2021 are:

  • Production capacity: 950 – 1030koz
  • AISC: $1033 – 1103/oz (A$1475 – A$1575/oz)
  • Reserves: 13.3 Moz
  • Reserves: 13.3 Moz
  • Resources: 30.5 Moz
  • Processing Capacity: 18.6 Mtpa

The key growth area going forward is at Fimiston South where production can rise to +500koz per annum by FY2024 and +675koz per annum by FY2028 as the access to high grade Golden Pike North is restored and Fimiston South becomes the dominant ore source. NST is also drilling across the Kalgoorlie District with 28 working rigs.

Yandal Operations

Yandal is also in a Tier-1 location consisting of Jundee, Thunderbox, and Bronzewing. The targeted production is 600koz per annum – with 200kozpa coming from Thunderbox, and 400kozpa coming from Jundee and Bronzewing. The Yandal operations are the lowest-cost asset out of all the assets in Northern Star’s portfolio and have recorded continuous production growth since FY2016. The production metrics for FY2021 are:

  • Production Capacity: 410-450koz
  • AISC: $791 – 854/oz (A$1130 – 1220/oz)
  • Reserves: 4.6 Moz
  • Resources: 10.2 Moz
  • Processing Capacity: 5.5 Mtpa

There are still growth opportunities from expansion in the Yandal Operations. The Thunderbox mill has a potential expansion to 6Mtpa, the Jundee mill to 5Mtpa, and the Bronzewing mill to 2.2Mtpa. The Yandal district is also being aggressively drilled by Northern Star with 25 operating rigs.

North American Operations

The North American operations consists of the Pogo plant where Northern Star’s production target sits at 300koz per annum. Pogo delivered quarter-on-quarter improvements throughout the year. Grades increased as new mining areas were accessed in South Pogo, Fun Zone and the Liese ‘LQ’ ore zones and the transition to long hole stoping was completed. The metrics from Pogo for FY2021are:

  • Production capacity: 180 – 220koz
  • AISC: $1200 – 1400/oz
  • Reserves: 1.5 Moz
  • Resources: 6.7 Moz
  • Processing Capacity: 1.3 Mtpa

Northern Star has revealed that the production capacity will grow to their target of 300koz per annum by FY2023 as an expanded processing plant that will yield 1.3 Mtpa will be completed in mid-2021. Aggressive drilling is also being conducted at Pogo with 13 rigs working after Covid19 restrictions. The drilling also already yielded excellent hits in the main production lodes.

Company Updates

Despite any noteworthy or price sensitive announcements from Northern Star apart from their half-year earnings, which were fairly positive, the stock price has fallen off the cliff from the November highs. It has been a similar story for most gold stocks and gold itself.

The merger between Saracen and Northern Star which resulted in Northern Star acquiring 100% of Saracen has brought in synergies that is estimated to be around $1.5 – $2 billion. It has catapulted the production target of NST to 2Moz per annum from just Tier-1 locations alone.

The story with most Aussie gold miners has been the same. Northern Star’s share price has taken a pounding as selling pressure intensified in a shift away from gold underpinned it. The rebalancing of several ETFs has also added selling pressure to gold miners in not just Australia, but globally. In the chart below, we can see the increase in trading volumes of Northern Star beginning to rise from 2021.

Half-Year Earnings

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Source: Northern Star Resources

  • Record underlying net profit after tax (NPAT) of A$194.4 million for the December Half, up 63% from previous corresponding period (pcp)
  • Earnings per share of 25¢; up 27% from pcp
  • Record statutory NPAT of A$184.5 million, up 46% from pcp
  • Record underlying free cash flow of A$226 million, up 94% from pcp, after record investment of A$108M in exploration and expansionary capital to grow production by 40% over the coming three years
  • Record Group EBITDA of A$472.2 million, up 47% from pcp
  • Revenue of A$1.1 billion, up 34% from pcp
  • Interim dividend increased to A9.5¢ (fully franked), up 27% from pcp; Based on payout policy of 6% of revenue and calculated on the pre-merger issued capital base
  • Significant financial, operational and Company growth achieved while maintaining superior returns, with annualised average return on equity of 17.4%
  • Gold sales of 480,431oz at an average price of A$2,386/oz; 39% of gold sold into the hedge book, reducing hedging to ~10% of next three years’ production
  • EBITDA from operations of A$517 million, up 42% from pcp; EBITDA margin of 46%
  • Cash, bullion, and investments of A$372 million on 31 December, and Bank debt A$375 million
  • On track to meet FY2021 production guidance of 940,000-1,060,000oz

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Source: Tradingview.com

Industry Analysis

Yes, gold is used as a hedge against inflation, but there is another macro-economic factor that affects gold prices even more so – Treasury yields. There is an inverse relationship between gold and interest rates. As bonds were sold off early into the year, the bond yields rose considerably and affected many sectors. Bond yields are essentially interest rates which determine how much interest you receive. Since gold does not give investors interest payments, the market usually jumps ship and sells gold for bonds. Gold prices have sunk 19% in the first quarter of 2021, but they have held up above the 20% mark – which signifies a technical bear market. Bets of a brighter economic outlook and fears over a spike in inflation and debt levels, prompted a bond sell-off and a dollar rally, raising the opportunity cost of holding bullion.

However, with further stimulus being introduced into the US economy and Feds across all developed markets looking to keep interest rates low in a bid to increase inflation and force economic recovery, the prospect for gold for the next 2-3 years is fairly positive. We may not see the highs of last year when the gold price was over $2000 an ounce, but the current price of $1700 should provide a floor in the medium-term. Higher rates make gold’s lack of yield more unappealing. Low rates make it look better. With the US and Australian Feds insisting that it will keep rates low and allow inflation to reach 2% and sustain it, gold stocks do look attractive at these low prices.

Investment Thesis

The financial performance of Northern Star has been spectacular in the past few years. They have consistently increased their production capacity which has allowed them to grow their revenues by over 40% in the past 2 years. Their gross margins and EBITDA margins have also expanded during this period. The record half year performance that we highlighted earlier shows that their growth strategy is working exceptionally well, despite revenues being slightly inflated given the extraordinarily high gold price during the period. The merger with Saracen has added quality assets to Norther Star’s portfolio and now, synergistically, the 30% production growth planned for the next 3 years is looking like it is well within reach.

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From a business standpoint, all the management can do is to increase production by buying quality assets or build on current assets by exploring for and discovering new deposits. The efficiency in operations and the management’s ability to stick to their strategy and deliver on growth in production has been spectacular. The table below shows the increase in production capacity that the management has consistently delivered.

The production guidance for FY2021 is 1.5 – 1.7 Moz. This translates to a 65% increase in production capacity from FY2020 even when the lower end of the guidance is considered. The AISC guidance is coming in at US$1080 – 1190 or A$1440 – A$1540. The growth capital expenditure for FY2021 is estimated to be US$485 million.

Assuming that Northern Star hits its guidance for FY2021 and considering that their production is estimated to increase by 30% in the next 3 years, we will further assume that NST’s production and revenues will grow by 10% year-on-year for the following 3 financial years. Northern Star enjoyed a 46% EBITDA margin in the first half of the year – an increase from 37.5%. Our final assumption would be to use 44% EBITDA based on the lower price of gold than what we saw during H1 FY2021. By keeping the average price of gold locked in at US$2000 an ounce for the same period (which is by no means a bullish assumption with the way inflation and interest rates are headed), we can extrapolate and arrive at below forecasts for revenues and EBITDA.

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These estimates that we have used are conservative, and we also know that Northern Star does not shy away from M&A deals to further increase its output and earnings.

The balance sheet of Northern Star is fantastic to say the least. As of the latest report, that is H1 FY2021, NST has $317 million in cash and equivalents, and $375 million in bank debt. The total liquidity the firm has is $672 million and it includes $300 million in undrawn revolving facilities, and $28 million in Gold Bullion. The firm is also in a position to take advantage of the high gold prices that it is estimated to carry out for the next few years as NST has hedged only 10% of annualised production at US$1680 over the next 3 years. The cash flow management by the firm has been very efficient. NST has taken advantage of the strong free cash flow generation during the half year and used it in good effect by striking a balance between – dividends, debt payments and exploration investment/capex to push for organic growth.

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Source: Northern Star Resources

As we can see Northern Star Resources is a growth company whose growth narrative is very positive for the next 5 to 7 years. Their current production level is 1.5 Moz per annum and with their strategy, they should hit the 2.1 Moz per annum target by FY2027. Hence, their dividend policy is fairly held back. NST pays 6% of revenues as their dividend payout. With revenues projected to continuously increase, the dividend will as well.

To compare the valuation multiples based on current capitalisation and next-twelve-months (NTM) forecasts, we have lined up Northern Star against two of the other big gold stocks that trade on the ASX – Newcrest and Evolution Mining. We see that Northern Star is trading at a lower P/E than its peer group and also a lower EV/Total Revenue multiple. We have also considered the PEG ratio or Price to Earnings-to-Growth. It measures the Price against the Earnings growth estimate of the company. A low ratio here is again good because it suggests that the company is undervalued relative to the growth forecast it has over the next few years.

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Recommendation

Northern Star Resources is a very well-managed company that is growing very quickly – both organically and by M&As. Their production is expected to ramp up and as a result, so will their revenues and earnings. NST is the best priced compared to its peer group and comes with a strong balance sheet to support growth seeking activities such as exploration and acquisitions. We recommend long-term investors to “Buy”.

 

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