More Gold Glistens For Northern Star

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Northern Star Resources has achieved production rates targeted for the next two years but new milling capacity could provide even more upside.

-Production aspirations now considered conservative with extra mill capacity
-Additional ozs now dependent on ore availability and capacity utilisation
-Strong history of accretive M&A and growing through exploration
 

By Eva Brocklehurst

Gold miner Northern Star Resources ((NST)) has provided a pleasant surprise, lifting production aspirations and confirming a strong June quarter. The company intends to produce 600,000 ozs per annum over the next two years from two mines, evenly split.

This is the first quarter this has been achieved since the suspension of production at Paulsens, with 150,000 ozs produced in the June quarter and some 10 days to go. Brokers are confident Northern Star will beat FY18 guidance of 540-560,000 ozs.

On this basis, Citi adds 10,000 ozs to its modelled production for the June quarter by increasing the milling grade at Kalgoorlie to 5g/t from 4.5g/t. Yet the 600,000 ozs target was outlined before the acquisition of extra milling capacity in Kalgoorlie.

Northern Star has milling capacity of 3.2mtpa following the acquisition of the South Kalgoorlie operations from Westgold Resources ((WGX)). This exists in a highly prospective region, from which brokers infer there could be many more opportunities for M&A.Shaw and Partners considers this the best news for some time, and expects Kalgoorlie's contribution should be supported by the upside that exists in South Kalgoorlie's 1.2mtpa milling capacity that is yet to be fully utilised.

The broker, not one of the eight stockbrokers monitored daily on the FNArena database, maintains a Buy rating and $5.70 target.

Production Upside

Macquarie also flags the first quarter of FY19 as the start of full operating control of the HBJ mill at Kalgoorlie. The broker forecasts higher throughput at Jundee, in line with commentary that the processing capacity there is now at 2mtpa on fresh underground ore.

Credit Suisse excludes any contribution from South Kalgoorlie in FY19 and suggests the addition of significant ounces is subject to ore availability and how much capacity is utilised, versus what is leased as toll mining capacity the third-party ore. The broker acknowledges costs are benefiting from both the stronger June quarter and a cessation of the high cost mining centre Paulsens.

However, taking the grade of resources in the region and running this through a bigger plant could mean the difference between 400,000 ozs and 300,000 ozs over time, UBS points out.

The broker considers the production aspirations conservative and lifts its modelled production to 692,000 ozs for FY19 and 697,000 ozs for FY20. The main risk is the mine life. UBS believes there is a path to lifting production to around 700,000 ozs per annum but there is a 5-6 year mine life on reserves which needs to be replaced to allay concerns.

Still, the broker remains confident, given Northern Star has a long history of growing reserves through exploration. Moreover, M&A has been accretive in the past and has added synergies with existing assets which is not always obtainable in the mining industry. Hence, UBS upgrades two levels, to Buy from Sell.

Credit Suisse expects elevated growth in strategic capital expenditure in the June quarter will moderate the cash flow after the South Kalgoorlie acquisition. While guidance upside appears material it will be defined by the availability of ore and the grade and the broker maintains an Underperform rating.

Northern Star operates three underground mining centres – Kalgoorlie, Jundee and Paulsens (suspended). Citi notes a fourth, Groundrush, could start in the medium term.

The database shows three Sell ratings, three Hold and one Buy (UBS). The consensus target is $5.74, suggesting -14.3% downside to the last share price. Targets range from $4.50 (Morgan Stanley) to $7.50 (UBS).

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