Company Overview: Northern Star Resources Limited (Northern Star) is a gold (Au) production and exploration company. The Company's principal activities include mining of gold deposits at Jundee, Kundana, Kanowna Belle and Paulsens; construction and development of extensions to existing gold mining operations at all locations; exploration at Central Tanami Project in the Northern Territory, and exploration and development of gold deposits within Western Australia. The Company's segments include Paulsens, WA Australia, which is engaged in mining and processing of gold; Kundana, WA Australia, which is engaged in gold mining; Kanowna Belle, WA Australia, which is engaged in mining and processing of gold; Jundee, WA Australia, which is engaged in mining and processing of gold; Tanami NT Australia, and Exploration, which consists of the projects in exploration, evaluation and feasibility phase, such as Mt Olympus, Fortescue JV and Electric Dingo, as well as ongoing exploration programs.
 
 

NST Details

Cash & Cash Equivalents As On September 30, 2019 Stood at A$372 Mn: Northern Star Resources Limited (ASX: NST) is involved in the exploration, development, mining and processing of gold deposits and sale of refined gold derived from the Jundee and Kalgoorlie operations in Western Australia and from the Pogo operations in Alaska; and exploration in relation to gold deposits in Western Australia, the Northern Territory and Alaska. Looking at the past performance over FY14 to FY19, total revenue and net income of the company have grown at a compound annual growth rate (CAGR) of 36.4% and 47.8%, respectively. Total revenue improved from $297.0 Mn in FY14 to $1,401.2 Mn in FY19, and net income improved from $21.9 Mn in FY14 to $154.7 Mn in FY19. Company’s profitability margins, return on equity and current ratio for FY19 stood better than the industry median, which indicate an improvement in company’s fundamentals than last year. Company held Cash, bullion and investments of A$372 Mn as on September 30, 2019, an increase of A$11 Mn from the previous quarter.

For FY20, an expansionary capital budget of A$116 Mn has been approved to underpin substantial organic growth opportunities at the operations including, A$44 Mn for developing and bringing online new mining areas at Pogo; A$24 Mn for development and infrastructure to bring Moonbeam underground online in Kalgoorlie; A$7 Mn for development for drill drives and access for new areas at 51% EKJV Operation; and A$37 Mn for excavation of exploration drill platforms at Jundee as well as setting up access to new mining areas. The company is also expected to invest a record A$76 Mn in exploration at Pogo, Jundee and South Kalgoorlie Operations.

As per FY20 guidance, production at Jundee, Kalgoorlie and Pogo Operations are expected to be in the range of 260,000-280,000 oz at AISC of $1,115-$1,195 per oz, 340,000-380,000 oz at $1,260-$1,370 per oz and 200,000-240,000 oz at AISC of $1,210-$1,320 per oz, respectively, taking Group’s total production estimates in the range of 800,000-900,000 oz at an average AISC of $1,200-$1,300 per oz.


Mine Operations Review for FY19 (Source: Company Reports)

Key Highlights of the Quarter ended at September’19: Gold sold in the period was reported at 184,005oz at an AISC of A$1,493/oz, where Australian operations reported gold sales of 155,043oz at an All-In Sustaining Cost (AISC) of A$1,250/oz and Pogo operations reported gold sales of 28,962oz at an AISC of US$1,919/oz. Despite investments of ~A$43 Mn in growth capital and exploration, underlying free cash flow for the period was reported at A$28 Mn.

In Jundee Gold Operations, 105,265 oz gold was mined,  and 81,427oz gold was sold at an AISC A$985/oz. In addition, ore stockpiles grew by 11,268 oz to 45,668 oz, predominantly from Ramone open pit mining. In Kalgoorlie Gold Operations, 78,714 oz gold mined and 73,616oz gold sold at an AISC A$1,542/oz. In Pogo Gold Operations, 35,883 oz was gold mined and 28,962 oz gold was sold at an AISC US$1,919/oz.

In August 2019, the company was honored to receive the 2019 Dealer Award at the Diggers and Dealers Mining Forum in Kalgoorlie, Western Australia in August 2019, for its acquisition of the Pogo Operations in Alaska on September 28, 2018.


Quarterly Key Group Performance Figures (Source: Company Reports)

Cash on Hand Reported at $319.1 Mn: Cash, bullion and investments as on September 30, 2019, increased by A$11 Mn to A$372 Mn as compared to the previous quarter, where cash at bank was reported at $319.1 Mn, Bullion awaiting settlement was reported at $0.1 Mn and Equity Investments was reported at $52.9 Mn. As on September 30, 2019, the company had an undrawn corporate debt facility with a self-arranged syndicate of Banks.
The Board of Directors declared a fully franked final dividend of 7.5 cents per share, with a record date and payment date on October 30, 2019 and November 20, 2019, respectively.


Cash, Bullion and Investments Figures (Source: Company Reports)

Key Highlights of FY19 for the period ended June 30, 2019: Underlying net profit after tax for the period was reported at A$179.2 Mn, as compared to A$211.5 Mn in the previous year. Statutory net profit after tax for the period was reported at A$154.7 Mn as compared to A$194.1 Mn in the previous year. EBITDA (earnings before interest, tax, depreciation and amortization) for the period was reported at A$479.7 Mn as compared to A$443.3 Mn in the previous period. Operating mine cash flow for the period was reported at A$587.6 Mn as compared to A$485.1 Mn in the previous year. Net mine cash flow for the year was reported at A$358.8 Mn as compared to A$324.6 Mn in the previous year.

Cash, bullion and investments as on June 30, 2019 was reported at A$361.4 Mn as compared to A$511.9 Mn in the previous year. This figure was after an investment of A$357.8 Mn in acquisition & growth initiatives where Pogo acquisition comprised cash contribution of A$175.5 Mn and growth capital/exploration of A$182.3 Mn and paying out a further A$70.3 Mn in fully franked dividends.


FY19 Income Statement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 35.48% of the total shareholding. Van Eck Associates Corporation and BlackRock Investment Management (UK) Ltd. hold maximum interest in the company at 11.68% and 7.73%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)

A Quick Look at Key Metrics: EBITDA margin for FY19 stood at 34.0%, better than the industry median of 29.1%. Net margin for FY19 stood in-line with the industry median of 11.0%. ROE for FY19 stood at 16.0%, better than the industry median of 12.3%, which implies that the company generated a better return for its shareholders than its peer group. Its current ratio for FY19 stood at 2.08x, better than the industry median of 1.75x, which implies that the company is in a better position to address its short-term obligations. Its debt to equity multiple for FY19 stood at 0.04x, lower than the industry median of 0.13x.


Key Metrics (Source: Thomson Reuters)

Recent Updates:

(a) Recently, the company increased its stake in Echo Resources Limited from 94.27% to 98.14%, effective from November 8, 2019.

(b) On August 26, 2019, the company announced its off-market takeover bid for Echo Resources Limited and entered into a Bid Implementation Agreement with Echo Resources Limited. The company acquired over 50% and control of Echo Resources Limited on October 14, 2019, extending the offer period by two weeks to October 28, 2019.

(c) On September 12, 2019, the company announced a tenement exchange agreement with Horizon Minerals Limited, with the transaction expected to complete in November 2019. In pursuant to agreement, the company is exchanging its 100% interest in the Rosehill, Brilliant North and Gunga West projects in Coolgardie, Western Australia and the Golden Ridge, Balagundi, Abattoir and Mt Monger projects in Kalgoorlie, for Horizon’s 100% interest in the Anthill, Blister Dam, New Mexico, White Flag and Kanowna North tenements in Western Australia.
 

What to Expect: As per Pogo Q1 Operational Update, growth strategy for Pogo operations is well on track, and the company expects to meet an increased processing rate of 1.3 Mtpa in early CY2021. Mine development rates have increased significantly since the introduction of new equipment early in the calendar year, with development metres up by 26% in the September quarter as compared to the previous quarter. Monthly development rate hit 1,400 m in the month of August and September, with the project expansion target has been set at 1,500 m. Stoping provided 37% of total mined ore tonnages in the September quarter, an increase of 33% over March quarter, and the project expansion target has been set at 60%. NST is committed to invest upto US$30 Mn for Pogo plant capacity expansion from 1 Mtpa to 1.3 Mtpa, where US$10 Mn will be invested in the financial year and US$20 Mn in FY2021.

FY2020 production guidance has been estimated at 800,000-900,000oz at AISC of A$1,200-A$1,300/oz.


FY20 Guidance Data (Source: Company Reports)

Key Risks: The company is susceptible to various risks such as price fluctuations, actual demand, currency fluctuations, drilling and production results, resources and reserve estimations, loss of market, industry competition, environmental risks, physical risks, legislative, fiscal and regulatory changes, economic and financial market conditions in various countries and regions, political risks, project delay or advancement, approvals and correct cost estimates.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies:

Method 1: Price to Earnings Multiple Approach (NTM):


Price to Earnings Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Method 2: EV/Sales Multiple Approach (NTM):


EV/Sales Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: NST’s share generated a negative YTD return of 2.60% and is trading below the average of its 52-week low and high of $7.630 and $14.055, respectively. Company’s Australian operations, underpinned by Jundee, were comfortably in-line with the production guidance and ensured strong cashflow for the quarter. At Pogo, growth strategy was demonstrated by further increases in the mine development rates, which are now on the cusp of hitting the increased monthly target of 1,500 metres. Moreover, the company is confident of achieving 60,000 stoping tonnes a month, which will lead to higher grades, increased production and lower costs, and will also be supported by the benefits of the expanded processing plant. Looking at the business prospects over the long-term, we have valued the stock using two relative valuation methods, i.e., Price to Earnings and Enterprise Value to Sales multiples, and arrived at a target price of high single-digit to low double-digit growth (in % term). Hence, we give a “Buy” recommendation on the stock at the current market price of A$9.000 per share on November 12, 2019.

 
NST Daily Technical Chart (Source: Thomson Reuters)

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