Company Overview: Northern Star Resources Limited (ASX: NST) is a global-scale Australian gold producer with a portfolio of low-cost, high-grade underground gold mines. The company operates three concentrated centres – Jundee; Kalgoorlie including Kanowna Belle, Kundana (the East Kundana Joint Venture – Northern Star’s interest: 51%), South Kalgoorlie and KCGM (Joint Venture – Northern Star’s interest: 50%); and Pogo Operations. The company’s mines allow it to effectively manage and control costs to operate efficiently and to specifically direct operational effort.

NST Details

Financial Growth Backed by Organic Investments and Accretive Acquisitions: Northern Star Resources Limited (ASX: NST) is a leading gold production company in Australia with Tier-1 world-class projects located in highly prospective and low sovereign risk regions of Australia and North America. The company’s strategy is focused on building a strong asset base through strategic acquisitions and aggressive exploration to extend the mine lives across its world-class operations. During FY20, NST invested heavily in its growth strategy through the $1.14 billion acquisition of a 50% interest in KCGM and associated assets. In addition, NST invested a further A$177.7 million in completing the takeover of Echo Resources Limited. Recently, NST implemented a merger with Saracen Mineral Holdings Limited, creating NST a leading global gold producer with high-margin assets located exclusively in Tier-1 jurisdictions. From 2016 to 2020, the company’s revenue and statutory NPAT have grown at a CAGR of 25.86% and 14.29%, respectively.

Top and Bottom-Line Trend, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Looking ahead, the company is focused on taking advantage of the favourable gold price environment with only ~10% of annualised production hedged over next 3 years. The company’s healthy balance sheet has allowed it to make significant organic investment and accretive acquisitions in the recent past, resulting in superior returns to shareholders. Following the implementation of Saracen merger on 12 February 2021, the company is now on a clear pathway to an annual production rate of 2Moz with growth driven by organic sources. NST expects shareholders’ returns to increase further in the coming years due to significant production growth and favourable outlook for gold price.

H1FY21 Result Highlights: For the half-year ended 31 December 2021 (H1FY21), the company reported a record underlying net profit after tax (NPAT) of $194.4 million, up 63% on the previous corresponding period (pcp). Further, the company reported record underlying free cashflow of $226 million, up 94% on pcp. During the period, the company’s in-mine drilling activity continued at high levels with a continuing focus on resource conversion and extension programs at all sites with a continued underground exploration focus at Jundee. For the half-year period, the company has declared an interim dividend of 9.5 cents per share, fully franked, up 27% on pcp. The interim fully franked dividend record date is 09 March 2021 with the payment date 30 March 2021. At the end of H1FY21, the company had liquidity of $672 million and cash, bullion & investments of $372 million. Corporate bank debt stood at $375 million as at 31 December 2020.

H1FY21 Results (Source: Company Reports)

FY20 Result Highlights: During FY20, the company sold a record total of 900,388 ounces of gold. Further, the company reported a record underlying net profit after tax of $291.0 million, up 69% on FY19. Underlying free cashflow grew by 190% to $423.1 million in FY20. Through effective discovery and disciplined acquisition, the company increased its gold Resource to 31.8 million ounces and gold Reserves to 10.8 million ounces, an increase year-on-year of 67% and 102%, respectively. During the year, NST invested heavily in its growth strategy through the $1.14 billion acquisition of a 50% interest in KCGM and associated assets. In addition, NST invested a further A$177.7 million in completing the takeover of Echo Resources Limited.

FY20 Results (Source: Company Reports)

Key Metrics: Over the last one year, the company’s profitability margins have improved, supported by organic investments and accretive acquisitions. Gross margin for FY20 stood at 26.6%, up from 21.4% in FY19. EBITDA margin for FY20 stood at 39.6%, up from 34.1% in FY19. Current ratio for FY20 stood at 1.74x, down from 2.08x in FY19.

Past 5-year’s Growth Profile and Profitability Metrics, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 32.17% of the total shareholding while the top four constitutes the maximum holding. Van Eck Associates Corporation and BlackRock Investment Management (UK) Ltd. are holding a maximum stake in the company at 10.8% and 7.55%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Merger with Saracen Mineral Holdings Limited: In October 2020, the company had announced a strategic merger-of-equals with Saracen Mineral Holdings Limited to create a Top-10 global gold miner operating exclusively in Tier-1 jurisdictions. Recently on 12 February 2021, the company announced the implementation of the scheme of arrangement pursuant to which NST will acquire all the shares in Saracen. All Saracen shares have been transferred to NST and eligible Saracen shareholders have been issued the Scheme consideration of 0.3763 NST shares for each Saracen share held on the Scheme record date. The combined entity of NST and SAR is expected to unlock geographic, operational and strategic synergies that will deliver exceptional value for all stakeholders.

Change of Interests of Substantial Holder: Recently, Van Eck Associates Corporation and its associated, reduced the shareholding in the company from 16.96% to 10.80%. Van Eck Associates Corporation now holds around 125,657,812 ordinary shares of the company.

Key Risks: The company is exposed to the risks associated with gold exploration, mining and production businesses. The company is also exposed to the risks related to gold price fluctuations, actual demand, currency fluctuations, drilling and production results.

Outlook: NST’s business seems well-positioned for further growth in cashflow on the back of its increasing production profile and leveraged exposure to the strong gold price. The company continues to make strong progress with its strategy at Pogo, where the introduction of a new mining method is delivering significant benefits.

With a healthy balance sheet comprising liquidity of $672 million and cash, bullion & investments of $372 million as at 31 December 2020, the company is well-placed to take advantage of the favourable gold price environment with only~10% of annualised production hedged over next 3 years. For FY21, the company expects its production from Australian operation to be in the range of 760-840koz with AISC expected to be between $1,440-$1,540/oz. From Pogo operations, the company expects its production to be in the range of 180-220koz. With the implementation of the scheme of arrangement with Saracen Mineral Holdings Limited, the company is now targeting production of 2Mozpa from three Tier-1 production centres by FY27.

FY21 Guidance (Source: Company Reports)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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 of NST has corrected by 14.70% and is trading lower than the average 52-week price level band of $8.850 and $17.03, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of $10.28 and resistance of $12.59. We have valued the stock using P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We have taken premium to its peer average P/E (NTM Trading multiple), considering the improved gold price environment, modest outlook, increased resource and reserves, and also taking into account the that the company has been commanding a premium in the past 3-years over its peer average. We Have taken peers like Newcrest Mining Ltd (ASX: NCM), Evolution Mining Ltd (ASX: EVN), IGO Ltd (ASX: IGO), etc. Considering the recently implemented merger with Saracen Mineral Holdings Limited, decent H1FY21 results, improved profitably margins, decent outlook, current trading level, and valuation, we give a “Buy” recommendation on the stock at the current market price of $10.85, up by 1.686% as on 23 February 2021.

NST Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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