Superior Growth Still Likely For Northern Star

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

Northern Star Resources has suspended guidance as its mines down-shift operations. Longer-term, brokers assess the performance will depend on progress at Pogo and expansion of the Kalgoorlie Super Pit.

-FY20 production and cost guidance withdrawn, dividend deferred
-Questions still exists surrounding the sustainability of Pogo
-Superior growth outlook versus large cap peers
 

By Eva Brocklehurst

Northern Star Resources ((NST)) has emerged as the first large Australian miner to withdraw guidance, appearing to brokers to be preparing for an extended economic impact from the coronavirus crisis.

Morgan Stanley suggests that suspending guidance in the light of employee safety — restructuring rosters to prevent fatigue — is a prudent step, and the balance sheet is robust enough to deal with the disruptions.

All mines are in operation but at reduced rates. The controls are causing disruptions to productivity but Kalgoorlie (WA) has, so far, been largely unaffected because the workforce is predominantly local. Jundee (WA), which uses fly-in, fly-out workers has been hit harder, as has Pogo (Alaska). Citi suspects production at Pogo, in particular, could be adversely affected for some months.

Morgan Stanley highlights that while overseas expertise at Pogo has been a key issue, now that mining has transformed to bulk methods fewer skilled expats are required. 

At this stage, the company has announced a -10-15% reduction to March quarter production, withdrawing FY20 production and cost guidance. However, this production is deferred, not lost, although the timing comes at a peak production period which will exacerbate the earnings impact on FY20, Credit Suisse notes.

The upcoming dividend payment is also deferred to September from March. Northern Star has $700m in debt and the only scheduled repayment in the next 12 months is $25m in December 31.

Macquarie suspects the company is intending to return to net cash as quickly as possible and, hence, has delayed non-essential capital. Northern Star has also requested the deferral of 2020 hedges, which would reduce delivery risk in the event of shut-downs but also allow delivery into the spot market.

The company is taking the necessary steps to protect its liquidity, in case conditions deteriorate further. UBS, in downgrading operating forecasts, assesses the robust gold price and currency changes will offset the impact so FY20-21 net profit is only slightly affected.

In contrast, Ord Minnett downgrades earnings estimates by -23% for FY20 and -11% for FY21 and reduces the rating to Hold from Buy. The broker suspects restrictions on workers in Western Australia and Alaska could tighten further.

While supply chain and consumables are not affected, the company's downgrade is a function of lost productivity as it becomes harder to move personnel in and around mines. Ord Minnett points out lower productivity and increased virus-related costs, including extra flights, means that unit costs will rise.

Pogo

While Pogo accounts for only around 15% of Citi's earnings estimates, any further impact on production is expected to weigh on sentiment. The broker suspects it will be a challenge to keep Pogo running and it remains too early to assess whether FY21 will be affected. Moreover, unlike the company's Australian mines, Pogo does not have a large stockpile processing capability.

UBS retains a Neutral rating because of the premium valuation and the slower-than-expected turnaround at Pogo. The scale of the impact to production from the March quarter downgrade makes the broker suspect that operations at Pogo were running below expectations prior to the onset of the virus.

The broker has been questioning the sustainability of Pogo running at more than 250,000 ozpa and is concerned the market has begun to fully price in the turnaround at Pogo, without this being sustainably on track.

Still, the share price is considered fair value and earnings and cash flow are positive. Credit Suisse upgrades to Neutral from Underperform as, looking beyond the current disruption, there is a superior growth outlook compared with large cap peers.

Super Pit

Longer-term the business performance will be dependent on the advancement of Pogo and the Kalgoorlie Super Pit. UBS forecasts three years of production at around 540,000 ozpa for the Super Pit while access to high-grade ore in the open pit is restored and lower grade stockpiles are processed.

Once this access is restored grade suggests the production rates of around 700,000 ozpa can be achieved from FY24-26. This would enable unit costs to fall. While it is possible the company can reduce costs to around $1000/oz, UBS does not factor this in because of ongoing cost inflation in the mining industry.

FNArena's database has one Buy rating (Macquarie), four Hold and one Sell (Morgan Stanley). The consensus target is $12.14, signalling 11.1% upside to the last share price.

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