Northern Star Dims As Pogo Disappoints

This story features NORTHERN STAR RESOURCES LIMITED. For more info SHARE ANALYSIS: NST

High hopes for the Pogo asset have not be realised over recent months, although brokers debate the extent to which this has dented confidence in Northern Star Resources.

-Hitting targets at Pogo remains the key catalyst for the stock
-Mineralised waste being used to keep the mill full at Pogo currently
-Extent of structural deterioration at Kalgoorlie hard to assess
 

By Eva Brocklehurst

Northern Star Resources ((NST)) missed expectations in September for the fourth consecutive quarter, particularly for its bright new Alaskan asset, Pogo. This has dented market confidence and is affecting the stock's premium valuation. A premium has become embedded in the share price, UBS assesses, after Northern Star posted several years of strong momentum for production, exploration and acquisitions.

The turnaround at Pogo is taking longer than expected to materialise. Despite the progress at Pogo, a development deficit is yet to be overcome and Credit Suisse believes the financial outlook is "ugly" as the company is caught in a cycle of presenting stretched targets that are challenging to deliver.

The broker acknowledges the operation should increasingly benefit from new high-productivity automated equipment as well as up-skilling of operators but suspects Pogo will not deliver to its potential until beyond FY20, and requires costs to fall and production and grades to rise.

Grades at Pogo were particularly disappointing, although Macquarie expects this to improve markedly as more stopes come on line. While there is some risk to near-term guidance for Pogo, the broker still considers the long-term outlook is intact.

Hitting targets remains the key catalyst and further exploration is keenly awaited. Macquarie continues to envisage outstanding potential for new discoveries at Pogo along with extensions and the possibility of expansion beyond the current 1.3mtpa upgrade. UBS agrees the turnaround is on the way, but around 6-12 months behind management's targets.

Delays

Northern Star took control of Pogo in October 2018 and has since changed the mining method. The late arrival of equipment in the March and June quarters delayed the training of staff in the new method and, as a result, there were no productivity benefits. At present, mineralised waste grading 1.7-4.3g/t is being fed into the mill to keep it full and this has reduced the weighted average grade.

Without this, the overall mined grade would have been 8.5g/t. UBS points out low feed grade will still be in evidence in the December quarter as new mining fronts are developed. Morgan Stanley asserts switching mining methods in a foreign operation is more complex than was previously anticipated and this creates risk. Stoping ore reached 37% of feed, well below the target of 60%.

Credit Suisse also points out the underlying potential of Pogo is primarily based on its geology, with the company appearing to conclude this is a repeat of the Jundee story that just requires infill and extension drilling to support higher production and deliver longer mine life.

If low grades persist, Morgan Stanley suggests FY20 guidance may be in jeopardy, although the company has flagged a stronger second half. Canaccord Genuity remains confident in the potential in the medium and longer term but also envisages a risk that Pogo will miss guidance in FY20.

The broker bases its confidence on the recent commitment to expanding the plant to accommodate the step-up in underground production rates, and will watch for exit production rates in FY20 as well as cost outcomes to get a feel for the longer-term potential.

Ord Minnett believes monthly exit run rates for key performance indicators are showing good progress and Pogo is on track. The broker sticks with a Hold rating, continuing to monitor progress closely while looking for an entry point.

Elsewhere

Grades at Kalgoorlie were also lower than expected in the September quarter, largely from Kanowna Belle, but should improve by the March quarter as access is gained to the Moonbeam area. Yet, Credit Suisse points out Kalgoorlie will always be in a reinvestment phase. What remains unclear is the extent of structural deterioration in the centre of the mine hub.

It appears that the introduction of South Kalgoorlie has been critical to achieving guidance. Consolidated reporting makes it hard, in the broker's view, to identify where the challenges are and how they may be overcome.

Meanwhile, Jundee was the main positive aspect of the report and produced 84,800 ounces, driven by much higher grades than brokers expected. Northern Star, Ord Minnett points out, has around 59% control of Echo Resources ((EAR)) and, in an area that is long on ore and short on processing capacity, suspects there are larger plans afoot for the Bronzewing asset.

The broker assesses Northern Star could be on track to well over 1m oz/pa by FY22 with extra ounces from Pogo, Bronzewing and potentially the Tanami operations, with even a re-start of Paulsens possible.

Northern Star produced 188,200 ounces of gold at an all-in sustainable cost of $1493/oz in the September quarter. Credit Suisse points out spot gold prices remain highly supportive of processing mineralised waste ore but warns this is contingent on not displacing high-grade ore that might otherwise have generated more margin.

Sustaining elevated grade from more than a single quarter has to date, in the broker's view, been the challenge for Northern Star. However, Ord Minnett notes Northern Star has had one of the more superior growth profiles in a sector where growth is hard to come by.

Canaccord Genuity, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $12 target. The database runs the gamut, with two Buy ratings, two Hold and two Sell. The consensus target is $11.82, signalling 16.4% upside to the last share price. Targets range from $9.60 (Credit Suisse, Morgan Stanley) to $15.00 (Macquarie).

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