Company Overview: Northern Star Resources Limited (ASX: NST) is a leading gold producer with Tier-1 world-class projects located in highly prospective and low sovereign risk regions of Australia and North America. The company owns a portfolio of low-cost, high-grade underground gold mines and 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.

NST Details

Merger with Saracen Mineral Holdings to Provide Operational and Strategic Synergies: Northern Star Resources Limited (ASX: NST) is a global-scale Australian gold producer with 100% production exposure in Tier-1 jurisdictions. In-line with its focus on building a strong asset base, the company has recently implemented a merger with Saracen Mineral Holdings Limited (SAR), creating NST into new, high-quality large-cap alternative in the Australian market. The company’s strategy is focused on generating strong growth at all levels while maintaining its industry-leading financial returns. The strength of the company’s operations and its robust margins were reflected in H1FY21, wherein the company reported a 94% increase in underlying free cashflow to A$226 million. Further, the company reported 34% YoY growth in H1FY21 revenue, mainly driven by increased gold sold and higher realised prices.

Revenue Trend (Source: Analysis by Kalkine Group)

NST was recently added S&P/ASX 50 Index, following the June quarterly review of S&P Dow Jones Indices. Looking ahead, the company is focused on growing its returns by expanding profitable production and by identifying synergies and savings. 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.

Decent Financial Performance in H1FY21: Despite the challenging operating conditions caused by the COVID-19 pandemic, NST reported 34% YoY growth in H1FY21 revenue to $1.1 billion, mainly driven by increased gold sold and higher realised prices. Further, the company reported a record EBITDA of $472.2 million, up 47% from pcp. Over the period, the company sold 480,431oz of gold at an average price of A$2,386/oz. For the half-year period, NST paid an interim dividend of 9.5 cents per share (fully franked), up 27% from pcp.

NPAT Trend (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 27.36% 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: Gross margin for H1FY21 stood at 30.4%, up from 25.6% in H1FY20. EBITDA margin for H1FY21 stood at 52.2%, up from 39.3% in H1FY20. ROE for H1FY21 stood at 8.7%, up from 8.4% in H1FY20. Current ratio for H1FY21 stood at 1.68x, down from 5.20x in H1FY20.

Profitability Metrics (Analysis by Kalkine Group)

Q3FY21 Result Highlights: Gold sold during the March 2021 quarter stood at 368,273oz at an AISC of A$1,598/oz. From Kalgoorlie Production Centre, NST sold around 234,419oz gold at an AISC of A$1,573/oz and from Yandal Production Centre, it sold around 94,116oz gold at an AISC of A$1,350/oz. 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.

ATO Class Ruling: On 28 May 2021, Australian Taxation Office (ATO) issued a Class Ruling for certain Saracen Shareholders who sold their Saracen Shares to NST on 12 February 2021 in exchange for 0.3763 NST Shares and received a dividend (the Special Dividend) of $0.038 per Saracen Share. The class ruling has confirmed that the Saracen Shareholders may elect to choose scrip-for-scrip rollover for CGT purposes (CGT Rollover). It has also confirmed that the Special Dividend was a fully-franked dividend for income tax purposes and franking credits of $0.016 per Saracen Share were attached to the Special Dividend.

Key Risks: The company is exposed to the risks associated with the fluctuation in the prices of gold. The company’s future performance is dependent on its ability to retain its highly qualified Management and Board. Recently, one of the company’s Directors, Shirley In’t Veld, resigned as a Non-Executive Director of the company. Investors’ confidence in the company is also an important factor that needs to be ensured by NST. Recently, The Vanguard Group, Inc. and its controlled entities were ceased to be a substantial holder of the company. Vanguard Group now holds 4.915% of voting power in the company.

Outlook: Looking ahead, the company expects its shareholders’ returns to increase further in the coming years, underpinned by significant production growth and favourable gold price. 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. 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). Notably, the merger with Saracen will 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 six months, the stock has corrected by 27.07% and is currently trading lower than the average 52-week price level band of $8.990 and $17.03. 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 a slight premium to its peer average P/E (NTM trading multiple), considering the recently implemented merger with Saracen Mineral Holdings Limited, increase in resource and reserves, modest outlook, and also taking into account that the company has been commanding a premium in the past 3-years over its peer average. Considering the improved financial performance in H1FY21, expected synergies from SAR merger, decent long-term outlook, current trading level, and valuation, we give a “Buy” recommendation on the stock at the current market price of $9.98 as on July 6, 2021, 1:15 PM (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 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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