Company Overview: Northern Star Resources Limited (ASX: NST) is a leading gold producer with a portfolio of high margin, high-grade underground and open pit gold mines. NST owns Tier-1 world-class projects located in highly prospective and low sovereign risk regions of Australia and North America. The company was listed on ASX on 17 December 2003. The strategy of NST is focused on building a strong asset base through strategic acquisitions and aggressive exploration to extend the mine lives across its world-class operations.

NST Details

Continued Organic Reserve Growth and Solid Asset Base to Support Future Production Growth:

• Completed Merger with Saracen: In line with its focus on building a strong asset base, NST completed a merger with Saracen Mineral Holdings Limited (SAR) in February 2021, creating NST into a new, high-quality large-cap alternative in the Australian market. NST expects that the merger with SAR will unlock geographic, operational, and strategic synergies that will deliver value for all stakeholders. Notably, the combined operations of NST and SAR are expected to reach an annual production rate of 2Moz by FY26.
• Growing Organic Reserve: Due to sustained exploration investment, the company has witnessed decent growth in its organic reserve. It recently announced 8% growth in its Reserves and 15% growth in Resources.

Improved FY21 Results: One of the important highlights of FY21 was the successful merger of NST with Saracen Mineral Holdings, which positively impacted the company’s production as well as its earnings.

• Addition of New Operations: During FY21, the company added two new operations into its portfolio - Thunderbox and Carosue Dam in Western Australia, augmenting its existing operations in Western Australia and at Pogo in Alaska.
• Rise in Gold Revenue: Gold revenue for FY21 stood at $2.8 billion, up 40% on FY20, mainly driven by the 3% YoY increase in average realised gold price per ounce and a 33% YoY growth in gold sold (excluding pre-production ounces).
• Record Underlying Results: Underlying EBITDA for FY21 stood at $1,159 million, up 47% from the previous year. Further, the company reported an underlying NPAT of $372 million, up 28% on FY20.
• Increase in Cash Earnings: Cash Earnings in FY21 increased by 10% YoY to $648 million, reflecting the cash-generating strength of the business.
• Rise in Dividend: For H2FY21, NST declared a final fully-franked dividend of 9.5 cents per share, taking the full year dividend to 19.0 cents per share, which is 11% higher than FY20.
• Rise in Statutory NPAT: Statutory NPAT for FY21 stood at $1,032 million, up 300% on FY20, mainly due to the recognition of $1,919.2 million non-cash gain in respect of the fair value remeasurement of the company's premerger 50% stake in KCGM.

Statutory NPAT Trend (Source: Analysis by Kalkine Group)

Key Metrics: EBITDA margin for FY21 stood at 40.6%, slightly up from 39.9% in FY20. Net margin for FY21 stood at 37.4%, up from 13.1% in FY20. ROE for FY21 stood at 20.4%, up from 15.9% in FY20. Current ratio for FY21 stood at 2.38x, up from 1.74x, demonstrating that the company has improved its ability to pay short-term obligations. Debt to Equity ratio for FY21 stood at 0.11x, down from 0.38x in FY20.

Profitability Metrics and Liquidity Profile (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 27.64% of the total shareholding, while the top four constitute the maximum holding. BlackRock Investment Management (UK) Ltd. and Van Eck Associates Corporation are holding a maximum stake in the company at 7.54%  and 5.75%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)

Latest Developments:

• Sale of Kundana Assets Completed: In line with NST’s strategy of actively managing its asset portfolio to maximise financial returns, it recently completed the sale of its Kundana Assets to Evolution Mining Ltd (ASX: EVN) for A$400 million.
• Board Changes: NST has recently announced the retirement of Tony Kiernan as a Non-Executive Director, effective from the November 2021 Annual General Meeting. The company also announced the appointment of Sharon Warburton as an Independent Non-Executive Director of the Company, effective 1 September 2021.

Key Risks:

• Fluctuations in Gold Price: NST is exposed to the risks associated with the fluctuation in the prices of gold as it could impact the company’s financials.
• Foreign Currency Risk: The company is exposed to the risks associated with the fluctuations in the exchange rates of foreign currency.

Outlook:  With the completion of the merger with Saracen, the company seems well placed to grow its production to 2 million ounces per year by FY26. NST believes that it has an enviable asset base and world-class inventory with decent potential for further organic growth. NST is focused on investing capital in those projects which will generate the strongest returns. For FY22, the company anticipates its gold production to be in the range of 1.55-1.65Moz with AISC of between $1,475-1,575/oz. Growth-related project development and exploration expenditure in FY21 is expected to be around $710 million.

Valuation Methodology: EV/Sales  Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by ~16% and is trading lower than the average 52-week price level band of $8.99 and $17.03, offering a decent opportunity for accumulation. The stock has been valued using a EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium to its peers’ average, considering the decent production outlook, strong asset base, and expected benefits of the merger with Saracen. For the purpose of valuation, peers such as Evolution Mining Ltd (ASX: EVN), IGO Ltd (ASX: IGO), AngloGold Ashanti Ltd (ASX: AGG) have been considered. Considering the company’s rising resources base, improved FY21 financial and operational performance, decent long-term outlook, current trading level and valuation, we give a “Buy” rating on the stock at the market price of $9.62 as on 31 August 2021, 11:30 AM (GMT+10), Sydney, Eastern Australia.

NST Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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