Northern Star Resources Limited

NST Details

Saracen and Northern Star Agree to Merger of Equals: Northern Star Resources Limited (ASX: NST) is engaged in the mining, processing & sales of gold and other minerals. The companies have recently announced a merger-of-equals via a Scheme of Arrangement under which Northern Star will acquire 100% stake of the shares in Saracen, wherein the shareholders of SAR will receive 0.3763 shares of NST and will also be paid a fully franked dividend of 3.8 cents per Saracen share. The merged entity will continue as Northern Star Resources Ltd and will have a combined market capitalisation of ~$16.0 billion with strong global share register. Post the completion of the merger, the shareholders of Saracen will own ~36.0% of the merged group while Northern Star shareholders will own ~64.0%. This merger seems well positioned for market leading growth across two Tier-1 jurisdictions, namely Australia and Alaska.

Merger Details (Source: Company Reports)

Transaction Rationale: This is likely to be a highly accretive transaction with high-margin assets located in Tier-1 jurisdictions. It has a clear trajectory towards gold production of 2Mozpa, with production set to grow by over 30% in the next 3 years. The companies retain significant opportunities across the portfolio and retains right skills with industry-leading management with an outstanding track record of delivering strong returns. The companies are likely to benefit from significant synergies with NPV in between $1.5-2.0 billion in pre-tax synergies to be delivered over the next 10 years via geographic, operational, and strategic synergies. The combined entity will have a large asset base and highly competitive global AISC profile of less than $1,485/oz and may result in the optimization of substantial pipeline of existing growth options, with free cash flow generation and healthy balance sheet.

Financial Highlights: During FY20, SAR reported group production of over 520,000 ounces at AISC of $1,101/oz. This production resulted in strong financial success with underlying EBITDA of $530 million and an increase of 173% in underlying net profit to a record $258 million. In the same time span, NST reported a strong organic growth outlook with an increase of 40% in annual production to 1.25Mozpa and costs falling by 10%. 

Outlook: The company has provided a snapshot of the post-merger entity and expects total gold reserves of 19.4 Moz and gold resources of 49.2Moz in FY21. It also expects to produce 1,540-1,700 koz of gold at an AISC in the range of $1,420-$1,550/oz in FY21.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

 Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The combined entity seems to be a low risk, diversified business with the scale, liquidity, and quality of cash flows attractive to both gold and generalist investors. As per ASX, the stock of NST gave a return of 29.53% in the past six months and a return of 4.07% in the last one month. The stock is inclined towards its 52-weeks’ high level of $16.645 and retains potential for further growth. On a technical front, the stock of NST has a support level of ~$13.026 and a resistance level of ~$16.13. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and have arrived at a target price with an upside of mid-single digit (in percentage terms). For the said purposes, we have considered Evolution Mining Ltd (ASX: EVN), Newcrest Mining Ltd (ASX: NCM) and Gold Road Resources Ltd (ASX: GOR) as peers. Considering the current trading levels, recent merger announcement with SAR, healthy fundamentals, and positive outlook, we recommend a ‘Hold’ rating on the stock at the current market price of $15.290, up by 10.637% on 6 October 2020.

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

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