Australia | Feb 21 2018
Gold producer Northern Star has reported very high-grade intersections at Jundee, with potential to extend mine life. Brokers are enthused but await confirmation.
-Continues to source opportunistic acquisitions in well endowed provinces
-Significant potential from Zodiac but short term upside limited
-Paulsens paused, while Kalgoorlie performance softens
By Eva Brocklehurst
Along with its first half results, Northern Star ((NST)) provided a significant update on its exploration, particularly around Jundee. The company has reported very high-grade intersections in extension and probe drilling over narrow widths. While these cannot be mined, they are considered a useful signal of the potential.
The company continues to maintain a strong cash balance and its first half earnings were generally consistent with expectations. In the light of exploration success at Jundee, Northern Star has opted to increase its exploration budget for FY18 to $45m from $10m.
The update highlights the world class nature of the geological structures that underpin these deposits, Ord Minnett asserts. Importantly, the capital required to bring these deposits to mine plans is low.
Macquarie notes the company is targeting some level of resource estimate in the 2018 update but suggests a more complete estimate will not come until 2019 and reserves and mine development occur some time after that.
The company is well funded for all options and the investment in Echo Resources ((EAR)) is a continuation of the domestic strategy, although the broker suggests it would need to go overseas to find more meaningful growth.
Credit Suisse interprets the company's statement maintaining dividend policy at 6% of revenue and a minimum cash balance of $300m as an intention to sustain a dividend even if a capital deployment opportunity were to take cash below that figure.
The company continues to articulate a strategy of earning returns from opportunistic acquisitions of high-quality infrastructure in well endowed provinces, previously starved of exploration and re-investment. This is not a significant hurdle, the broker acknowledges, as long as exploration delivers on expectations and best-in-class productivity is maintained.
However, growth in mine life is different to underlying material production growth, and Credit Suisse remains troubled by the dilemma of placing capital between sustaining production and growth developments.
Shaw and Partners suggests the dividend policy is unlikely to consume the cash pile and therefore there are plenty of options for organic growth.
The company believes it has discovered a new and significant mineralised corridor which could deliver a quantum shift in the mine life and outlook for Jundee.
Citi agrees Jundee is promising, thanks to recent high-grade discoveries such as Zodiac and Armada, which the company expects will extend mine life to over 10 years from the current 8.5 years.
The broker notes the company has a good track record of meeting forecasts, so extends Jundee in its models, at a similar head grade to current production until it is known just how the new high-grade drilling converts to reserves.
Ord Minnett is most interested in the Armada trend, which is now over a 2.5km strike, and contains mineable widths of 14m at 8g/t, 13m at 9g/t and 19m at 6g/t.
The broker observes these are in keeping with the Westside lode, the main ore body from which Newmont was producing previously at Jundee. Moreover, the Ramone open pit target could be brought into production within 18 months. The broker expects another reserve upgrade is in store, assuming 5.2m ozs, with declining grades, versus the current 3.5m ozs reserve.
Deutsche Bank finds the Ramone prospect interesting but at an early stage, noting an open pit resource is expected in July. If developed, at 35km south of Jundee, ore feed could support a plant upgrade at Jundee or be sent to the Echo Resources Bronzewing site for toll treating. The broker already captures an additional 2.1m ozs of resources beyond current reserves at Jundee in its estimates.
Identifying extensions at the Zodiac or deeper trends could provide a shorter route to production versus an acquisition, and thereby, Macquarie acknowledges, provide significant potential upside. However, the short term impact is likely to be limited. The broker notes the Zodiac zone is deep and some distance from available underground drill platforms.
Credit Suisse agrees it is not easy, highlighting the translation from intersection grades to reserve grades disappointed in FY17. The broker remains cautious about extrapolating to reserves from “high-grade holes”.
The region has produced 7m ounces over the past 22 years, Shaw and Partners notes, and while prolific in the short term there likely to be a long tail from now on.
Still, the broker is optimistic, although requires more detail on the proposition to be completely confident. Shaw and Partners, not one of the eight stockbrokers monitored daily on the FNArena database, has a Buy rating and $5.70 target.
While the company looks set to deliver interesting results from Jundee, Macquarie considers the stock fully valued. Meanwhile, earnings margins at Kalgoorlie are reduced to 49% from 56% and, while still impressive, this suggests to the broker the performance from Kalgoorlie has softened over recent quarters.
Paulsens has been paused ahead of a proposed 3D seismic survey and this gives the impression, Credit Suisse believes, that the ore body is not what it was projected to be.
The broker also suggests acquiring another asset, if it is possible in the current market, is unlikely to be priced in line with prior acquisitions and, therefore, unlikely to generate the same spectacular returns.
Deutsche Bank believes the company needs to invest in underground mine development and exploration to extend the mine life at each of its assets and, as the stock is trading above valuation, maintains a Sell rating.
FNArena's database shows four Hold and three Sell ratings. The consensus target is $5.37, signalling -10.7% downside to the last share price. Targets range from $4.45 (Morgan Stanley) to $6.30 (Citi).
See also, Zodiac Discovery The Focus For Northern Star on January 29 2018.
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