Company Overview: 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 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

Long-term Growth Underpinned by Solid Reserve Growth: 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’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. Recently, NST implemented a merger with Saracen Mineral Holdings Limited (SAR), creating NST a leading global gold producer with high-margin assets located exclusively in Tier-1 jurisdictions. Despite the challenging operating conditions caused by the COVID-19 pandemic, NST reported 94% YoY growth in its underlying free cash flow for H1FY21 and 46% YoY growth in statutory net profit, demonstrating the strength and the resilience of the company’s operations.

NPAT Trend (Analysis by Kalkine Group)

NST recently announced significant growth in Reserves and Resources, led by a substantial increase at KCGM. This has strengthened NST’s unique position in the global gold industry. Currently, the company’s exploration focus is on large, low-cost mining areas that maximise fleet productivity. NST expects its production to rise to around 675,000oz pa by FY28. Further, the merger with SAR is expected to unlock geographic, operational and strategic synergies that will deliver exceptional value for all stakeholders.

H1FY21 Results Highlights: For H1FY21, NST reported record underlying free cashflow of $226 million, up 94% on pcp. Further, the company reported a record underlying net profit after tax (NPAT) of $194.4 million, up 63% on the previous corresponding period (pcp). During the period, the company’s in-mine drilling activity continued at high levels with a focus on resource conversion and extension programs at all sites with a continued underground exploration focus at Jundee. Statutory profit after tax stood at $185 million in H1FY21, up 46% on pcp.

H1FY21 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 26.10% of the total shareholding, while the top four constitutes the maximum holding. BlackRock Investment Management (UK) Ltd. and Van Eck Associates Corporation are holding a maximum stake in the company at 7.55% and 5.75%, respectively, as also highlighted in the chart below:       

(Analysis by Kalkine Group)

Key Metrics: For H1FY21, the company reported a gross margin of 30.4%, up from 25.6% in H1FY20. EBITDA margin for H1FY21 stood at 52.2%, up from 39.3% in H1FY20. Current ratio for H1FY21 stood at 1.68x, down from 5.20x in H1FY20.

Profitability Metrics (Analysis by Kalkine Group)

March Quarter Highlights: During the March 2021 quarter, NST sold 368,273oz of gold at an AISC of A$1,598/oz. Despite the planned one-off 14-day mill shut at KCGM, unplanned maintenance at the Thunderbox mill, and lower head grades at Pogo due to mine plan sequencing, NST reported an underlying free cash flow of A$97 million during the quarter. Over the quarter, NST generated revenue of A$772 million. As at 31 March 2021, the company had cash and cash equivalent of $637.2 million and corporate bank debt of $658 million.

Mineral Resource and Reserve Update: In May 2021, NST announced that as at 31 May 2021, the group’s reserves stood 21Moz, up 8% from 19Moz at 30 June 2020, led by KCGM, with reserves of 11.6Moz, up 20% from 9.7Moz. Group’s resources stood at 56.5Moz as at 31 March 2021, up 15% from 49Moz at 30 June 2020. Notably, the measured and indicated resources increased 14% to 38.7Moz.

Change of Director’s Interest: Recently, one of the company’s Directors, Sally Langer, acquired ~2,210 ordinary shares of the company at a consideration of $11.30 per share via on market trade.

Dividend Re-Investment Plan Announced: NST recently announced a dividend re-investment plan (DRP), under which the eligible Shareholders can elect to reinvest either part of all of their dividend payments into additional fully paid NST shares in a simple, cost-effective way. Notably, no brokerage or commission will be charged for acquiring shares under DRP.

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

Outlook: NST has a track record of paying increasing returns to its shareholders via dividend payments. For H1FY21, the company paid an interim dividend of 9.5 cents per share, up 27% on pcp. NST expects shareholder returns to increase further in the coming years due to significant production growth and favourable gold price. The company is on track to meet its FY21 pro-forma production guidance of 1.5-1.7 million ounces at AISC of A$1,370-1,470/oz (Australian Operations) and US$1,200-1,400/oz (Pogo Operations). The merger with Saracen is expected to lift the production profile to the highest-margin ounces and deliver an estimated A$1.5-2.0 billion of NPV (pre-tax, net of stamp duty) over the next 10 years.

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

Source: 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 provided a return of 18.99%. The stock is currently trading lower than the average 52-week price level band. We have valued the stock using the 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 a slight premium to its peer average P/E (NTM trading multiple), considering the modest outlook, increased resource and reserves, and also taking into account that the company has been commanding a premium in the past 3-years over its peer average. Considering the expected benefits from the recently implemented merger with Saracen Mineral Holdings Limited, improved profitably margins in H1FY21, decent long-term outlook, current trading level, and valuation, we give a “Buy” recommendation on the stock at the current market price of $11.050, up by 1.097% as on 8 June 2021.

NST Daily Technical Chart, Data Source: REFINITIV

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

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above. 

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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