Australia | Nov 15 2023
This story features NORTHERN STAR RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: NST
The ASX doesn't offer many choices to invest in Tier-1 gold mining. New research highlights Northern Star Resources as a scarce investment opportunity.
-Northern Star Resources well funded for upcoming capex
-KCGM expansion a scarce investment opportunity, according to Jarden
-Expansion will lower costs, but restrict free cash flow in the interim
-Two factors mitigating capex inflation risk
By Mark Woodruff
Northern Star Resources ((NST)) is one of the ten largest gold companies globally, when measured both in ounces produced and market capitalisation, highlights Jarden. The broker has initiated research coverage with an Overweight rating and 12-month target price of $13.60.
Jarden finds Northern Star is attractively priced on an absolute basis and relative to both global and domestic peers.
The balance sheet, with a net cash position of $284m, is capable of funding an upcoming elevated period of capital expenditure, while still maintaining a history of strong shareholder returns, highlight the analysts.
All assets are in Western Australia, except for the Pogo operations, which are situated in the similarly attractive jurisdiction of Alaska, notes the broker.
Gold production centres owned and operated by Northern Star are Kalgoorlie, Yandal and Pogo (pictured below).
Yandal includes operations at Jundee, Thunderbox and Bronzewing, while Kalgoorlie includes the Kanowna Belle and Carosue Dam operations, along with the Kalgoorlie Consolidated Gold Mines (KCGM) asset.
KCGM accounts for almost two thirds of Jarden’s total valuation for Northern Star, and is considered a scarce investment opportunity, given it is a true Tier-1 asset, located in a Tier-1 jurisdiction with abundant optionality and ongoing exploration prospects.
The mine life extends out to 2048, and potentially beyond.
A reinvestment cycle has begun at the site to drive fundamental growth and improve margins, which Ord Minnett believes is a logical move to transform KCGM into a top-5 producing gold mine globally.
The -$1.5bn expansion at the mill to 27mtpa by FY27 will increase production to around 900koz from FY29, and will push the operation down the cost curve, yet will also diminish the near-term free cash flow (FCF) appeal of the stock, points out Ord Minnett.
Apart from the prevailing gold price, the critical risk to project returns is capex inflation, in Jarden’s view, which has afflicted numerous projects (by -20-30%) either under recent or current construction in Western Australia.
In the prevailing tight labour market, one factor working in the company’s favour is KCGM’s proximity to the major town of Kalgoorlie, compared to a remote location that requires more sophisticated and expensive logistics and site allowances, explain the analysts.
Also, the initial $1.5bn capital budget includes a $150m allowance for escalation and contingency, helping provide a solid buffer against inflation.
September quarter results
A better performance relative to peers was behind a share price rally following first quarter results on October 19, suggested Ord Minnett.
Highlights for Macquarie included Pogo achieving its 1.3mtpa nameplate run rate despite a mill shut, and Thunderbox achieving a 5.5mtpa throughput rate in the first quarter and 6.0mtpa (nameplate) in August.
The KCGM pit is also on schedule to access higher grades at Golden Pike North in the second half, noted the broker.
Management retained FY24 guidance of 1.6-1.75moz at an all-in sustaining cost (AISC) of $1,730-1,790/oz, and management expects a stronger second half via grade lifts at KCGM and Jundee, the Thunderbox mill ramp-up and improvements at Pogo, explained Macquarie.
At share prices prevailing in late October, following Northern Star’s September quarter results, UBS preferred Evolution Mining ((EVN)) and Newcrest Mining ((NCM))/Newmont ((NEM)), given lower costs and superior free cashflow in the short term.
Both of these companies also offer a bit of copper upside, explained the analyst.
This broker cautioned Northern Star is exposed to unique risk, given the company is at the start of its investment cycle which comes with weaker free cashflow.
Canaccord Genuity, commenting after first quarter results, expected a strong recovery over the remainder of the financial year.
While Goldman Sachs appreciates the outlook for Northern Star Resources on expanded KCGM operations and other asset growth, this broker assigns a Neutral recommendation as growth spending limits FCF yields to less than 1% over the next three years, and also because of the more concentrated near-term execution risk for the KCGM expansion.
Two days ago, UBS raised its 2025/226 gold price forecast by around US$200/oz and now forecasts for FY24-26 prices per ounce of US$2,085, US$2,200 and US$1,950, respectively, driving forecast earnings upgrades across the broker’s research coverage.
The broker anticipates gold will benefit as the end approaches for interest rate hikes by the Federal Reserve in the US, and then the growth outlook becomes the main concern for investors globally. The US economy is expected to fall into recession, meaning the Fed will then cut rates and the US dollar will weaken, leading to a fall in ten-year real yields.
This broker’s target for Northern Star Resources rises to $11.95 from $11.20 and the recommendation is Neutral. UBS has Buy ratings for Evolution Mining, SSR Mining ((SSR)), De Grey Mining ((DEG)) and Gold Road Resources ((GOR)).
There are five brokers monitored daily by FNArena which cover Northern Star Resources, with one Buy rating and four Hold (or equivalent) recommendations.
The average target price of the five brokers is $12.75, which suggests just over 12.5% upside to the latest share price.
Jarden, Goldman Sachs and Canaccord Genuity are not covered daily. These brokers have Overweight, Neutral and Buy ratings, respectively, and an average target price of $13.05.
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