Northern Star Resources Limited

NST Details

Decent Growth in Reserves and Resources: Northern Star Resources Limited (ASX: NST) is involved in the production and exploration of gold and other minerals. The market capitalisation of the company stood at ~$10.57 Bn as on 18^th August 2020. As at 30^th June 2020, the company’s resources have been increased by 67% to 31.8Moz. In addition, measured and indicated resources went up by 94% to 20.8Moz. The company’s reserves experienced a rise of 102% to 10.8Moz, underpinning strong growth in forecast production and long mine life visibility. Over the past five-years, the reserves per share have increased by 348%.

Resources and Reserves Growth (Source: Company Reports)

Guidance: For FY21, the company is expecting production from Australian operations in the range of 760,000-840,000oz at an AISC of A$1,440-A$1,540/oz. The production from Pogo is expected between 180,000-220,000oz at AISC of US$1,200-US$1,400/oz. The company is optimistic about considerable opportunity to grow reserves with the conversion of the 31.8Moz resource base. The company has scheduled to release its FY20 results on 19^th August 2020.

Key Risks: The company’s performance is sensitive to operational safety risk, which arises from the failure in managing recognised safety hazards. This is largely because of exposure to and use of chemicals, dangerous goods, and explosives as well as ground seismicity. In addition, the business is also exposed to financial risks, such as foreign exchange, interest rate, credit risk, and liquidity risk.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Net margin of the company stood at 15.3% in 1H FY20, reflecting YoY growth of 2.3%. This indicates that the company has improved its capabilities to convert its top-line into the bottom-line. Current ratio of the company stood at 5.20x in 1H FY20 against the industry median of 1.85x. This reflects that the company is well-positioned to address its short-term obligations. On technical analysis front, the stock of the company has a support level at ~$14.011 and a resistance level at ~$16.764. We have valued the stock using the P/E multiple based illustrative relative valuation method, and for the purpose, we have taken peers such as Newcrest Mining Ltd (ASX: NCM), St Barbara Ltd (ASX: SBM), and OceanaGold Corp (ASX: OGC), and arrived at a target price of high single-digit upside (in percentage terms). Thus, in light of the growth in reserves and resource, improvement in net margins, decent liquidity position and outlook, we give a “Hold” recommendation on the stock at the current market price of $14.990 per share, up by 5.046% on 18^th August 2020, on account of resource reserve and guidance update.

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

Saracen Mineral Holdings Limited

SAR Details

A Look at Year End Reserves and Resources: Saracen Mineral Holdings Limited (ASX: SAR) is engaged in the production and exploration of gold. The market capitalisation of the company stood at ~$6.2 Bn as on 18^th August 2020. As at 30^th June 2020, the reserves of the company stood at 190Mt @ 1.4g/t for 8.6Moz while resources stood at 320Mt @ 1.7g/t for 17.0Moz. The company added that its strategy of making opportunistic acquisitions and then unlocking their full value via exploration and development has presented substantial value for shareholders. During the June 2020 quarter, the company reported production of 145,830oz at an AISC of $1,152/oz.

Group production and AISC (Source: Company Reports)

Production Guidance: For FY21, the company expects to report production in the range of 600,000 - 640,000oz at an AISC of $1,300 - $1,400/oz. The company anticipates growth capital of $429 million and exploration of $55 million. The company is likely to release its FY20 results on 19^th August 2020.

Key Risks: SAR’s business is sensitive to commodity risk, which is influenced by the movements in gold prices. In addition, the company is exposed to the Australian dollar currency risk on gold sales, which are denominated in US dollars.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: As at 30^th June 2020, the cash and a debt balance of the company stood at $369 million and $321 million, respectively. Gross margin and EBITDA margin of SAR stood at 33.5% and 47.4% in 1H FY20, reflecting YoY growth of 8.4% and 10.3%, respectively. On the technical analysis front, the stock of the company has an immediate support level at ~$5.147 and a resistance level at ~$6.353. We have valued the stock using the P/E multiple based illustrative relative valuation method, and for the purpose, we have taken peers such as Northern Star Resources Ltd (ASX: NST), IGO Ltd (ASX: IGO), and Evolution Mining Ltd (ASX: EVN), and arrived at a target price of high single-digit upside (in percentage terms). Thus, in light of the substantial value for shareholders, growth in key margins, and guidance, we give a “Hold” recommendation on the stock at the current market price of $5.750 per share, up by 2.313% on 18^th August 2020.

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

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