Golden Year Ahead For Northern Star

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

2020 is shaping up as a pivotal year for Northern Star Resources and, if successful, could make the miner the second-largest gold producer on the ASX.

-Pogo and Kalgoorlie Super Pit could push gold production above 1mozpa
-A continuation of elevated gold prices and a surmounting of geotechnical challenges required
-Additional growth potential in Echo Resources acquisition
 

By Eva Brocklehurst

Northern Star Resources ((NST)) gained ground on several fronts in the December quarter, setting up a number of potential catalysts in 2020 including added production from the Kalgoorlie Super Pit, expansion at Jundee and improved development rates at Pogo.

Citi was pleased with the size of the turnaround at Pogo and believes both Pogo and the Kalgoorlie Super Pit will be transformational and take production through more than 1m ounces per annum, which would make Northern Star the second largest gold producer on the ASX.

The highlight of the quarter was the acquisition in December of Newmont's 50% joint venture interest in KCGM, joining Saracen Mineral Holdings ((SAR)) as the Australian owners of the so-named Kalgoorlie Super Pit.

Credit Suisse points out Northern Star brings high-grade narrow-vein mining expertise to the JV while Saracen brings modest scale and simple open pit expertise. Moreover, with new management taking over a very mature operation it might mean there is a change in culture that can deliver a lower cost base and support future life extension.

Ultimately, the broker assesses the acquisition is underpinned by a positive view on the gold price. The continuation of elevated gold prices and a recovery from the geotechnical challenges in restoring access to the Super Pit are required to extract a return on the purchase price.

Macquarie agrees the next catalysts will be from Pogo and the Super Pit. At Pogo it will be the continued ramp up of production and completion of the mill expansion in FY21. At the Super Pit it will be the outcome of a strategic review that will assess the optimisation of the pit wall remediation and future underground potential.

All-in sustainable costs (AISC) of $1421/oz in the quarter were well above broker estimates, although they fell from $1493/oz in the September quarter. Guidance for FY20 is for 920,000-1.4m ounces at AISC of $1240-1340/oz.

Pogo

Pogo sold 22,500 ounces of gold in December, which Macquarie considers is a milestone in its return to full production. While development and stoping rates are now close to targets, this has come at a higher cost than the broker expected, 31% above forecasts.

Production was up 56% in the December quarter after a poor September quarter and a development deficit is being progressively overcome, although Credit Suisse notes this has been much more challenging than expected at the time of acquisition.

The broker describes costs as "ugly", albeit improving and downgrades the stock to Underperform from Neutral on valuation. For now, Citi also believes the value has been priced in and downgrades to Neutral from Buy.

This view is predicated on a change in the operating model at Pogo and the cost reductions the joint venture can extract at the Super Pit. The inclusion of the Super Pit in the second half and continued improvement at Pogo should mean the company hits its mid range forecast for ounces, although Citi acknowledges cost guidance may be a stretch.

Morgan Stanley is less enthusiastic, noting costs have exceeded both its expectations and guidance and suspects guidance in FY20 may be at risk, particularly when the higher-cost Kalgoorlie Super Pit starts contributing in the second half.

An inflection point has been reached at Pogo which may reduce costs, the broker acknowledges. Around 80% of ore came from stopes as a new mining method takes effect. The company has maintained its guidance for the mine, which implies a significant drop in costs in the second half.

UBS does not believe Pogo is delivering on its full potential, as development rates for the quarter was still below that required to ensure sustainable production. The broker suspects the March quarter could still report variable production and cost performance.

Jundee

Management has also formally announced an expansion in Jundee's milling capacity, which supports a 5% upgrade to UBS earnings forecasts for FY21-22. This will take capacity to 2.7mtpa from the current 2.2mtpa.

UBS believes there is additional growth potential from Echo Resources which is not yet fully appreciated by the market, suspecting this recent takeover could provide another 200,000 ounces producing mine. Macquarie also notes the completion of the Echo Resources takeover means the Julius pit is now available for mining, while there are other open pit opportunities at Jundee itself.

Canaccord Genuity, not one of the seven stockbrokers monitored daily on the FNArena database, has downgraded Northern Star to Hold from Buy based on valuation, with a target of $13. The broker continues to rate the organic potential of the portfolio highly and remains conservative about its modelling for the Super Pit.

The Echo Resources takeover and planned development as well as the Super Pit acquisition have been included in Baillieu forecasts. Nevertheless, the broker asserts there is a significant amount of work that both the market and the joint venture need to do to gain a better understanding of the value of the Super Pit.

The broker, also not one of the seven, has a Hold rating and $12.37 target. The database has three Buy ratings, one Hold (Citi) and two Sell. The consensus target is $12.18, suggesting -1.3% downside to the last share price. Targets range from $9.10 (Morgan Stanley) to $14.00 (Macquarie).

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