Is Northern Star Fully Valued?

This story features NORTHERN STAR RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: NST

Northern Star delivered a robust June quarter for gold production, setting records. However, brokers disagree as to whether the stock is fully valued.

-Significant effort to extend reserves at Jundee
-Capacity to generate over 700,000 ozs per annum
-Stock now trading in line with global gold producers
 

By Eva Brocklehurst

Northern Star ((NST)) is intensifying its development and exploration expenditure after breaking records for gold production in the June quarter. The company has set a $60m exploration budget for FY19 that is 33% above the prior year.

A further $74m is slated for ancillary growth projects, such as a dual purpose decline development and increased Kanowna Belle tailings capacity. Northern Star is making a significant effort to extend reserves at Jundee, utilising ten diamond drilling rigs and targeting a number of the deeper areas of the mine.

The planned expenditure bodes well for continued growth in resources and reserves going forward and Canaccord Genuity considers the investment, in the absence of accretive M&A, a pragmatic approach to growing the scale of operations.

Brokers remain of the view that the company's mill in Kalgoorlie will be constrained and third-party processing capacity will be needed until further opportunities to acquire another mill become available. Macquarie also believes FY19 guidance could be conservative, noting the company is still considering the potential for mining at HBJ and guidance could be upgraded post completion of the review.

Credit Suisse was disappointed with FY19 guidance, which implies the 1.2mtpa Jubilee capacity may only contribute an additional 20-40,000 ounces. The broker suspects a step reduction in grade is likely, and also believes that the June quarter grade, production and cash were exceptional rather than sustainable.

Production Outlook

June quarter production stood out, with the company delivering 184,000 ounces at an all-in sustaining cost (AISC) of $982/oz. A strong production outcome was driven by increased mining and milling rates at Jundee and higher grades at the Kalgoorlie operations.

Net cash increased to $512m and milled tonnage rose by 34%, largely from the integration of South Kalgoorlie capacity. FY19 production guidance is forecast at 600-640,000 ounces at AISC of $1025-1125/oz.

Argonaut believes the company has a strong capacity to generate over 700,000 ounces per annum in the short term via existing capacity and toll treatment, or with M&A. Canaccord Genuity expects some normalising in the grade profile and lower quarter on quarter production going into FY19 but agrees there is scope for the company to grow annualised production beyond 700,000 ozs per annum.

The FY19 exploration program is likely to lead to further growth in production, Macquarie concurs, factoring in higher rates of utilisation at the Jubilee mill as well as higher mining rates at Jundee. The broker also adds two years of mine life to assumptions for Jundee and Kalgoorlie.

UBS observes the production result proves the infrastructure is capable, albeit a full year of mining rates/grade has not been sustained. Still, it highlights the sprint capacity that can be achieved, although this will require more in the form of reserves.

A lift in the six-year mine life and reserves could form the next catalyst although UBS, while retaining estimates for 692,000 ounces in FY19, acknowledges the production outcome will likely come down to grade.

Valuation

Canaccord Genuity notes the company has the strongest balance sheet of its peer group with net cash of $512m at the end of FY18. The broker not one of the eight monitored daily on the FNArena database, maintains a Hold rating as the stock is considered fairly valued. Target is $7.10.

Also not one of the eight, Argonaut has a Hold rating and $6.34 target. The broker assesses the enterprise value/production is now in line with North American producers and the stock is now trading in line with large global gold producers, such as Newcrest ((NCM)) and Gold Corp.

UBS calculates an extra year is worth around $0.40 per share, and the company has in the past envisaged the possibility of more than 10 years of production at Jundee. A mine life of over 10 years would more than justify its price target, UBS asserts. Hence, a Buy rating.

Citi sticks with a Neutral rating because of the strong share price performance. The company has a lot of levers to pull on costs, in terms of sourcing its ore, and the broker assumes it will not lose margin by milling higher cost ounces.

Ord Minnett downgrades to Lighten from Hold, citing a declining gold price and recent outperformance in the stock. The broker recognises the significant value the company has been able to create by expanding existing operating assets, and the potential catalyst from a resources and reserves update.

There was no news on Paulsens, which ceased production in December, and it failed to deliver on six-month production guidance. Management has confirmed stopes, development and stockpiles have been left in position for a rapid re-start for when, and if, drilling would successfully contribute to mineable inventory.

The database has two Sell ratings, two Hold and one Buy (UBS). The consensus target is $6.74, signalling -2.5% downside to the last share price. Targets range from $5.20 (Credit Suisse) to $7.50 (Macquarie, UBS).

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