Northern Star Aiming To Repeat Jundee Success

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

WA gold miner is hoping to leverage the expertise it has gained in revitalising operations at Jundee by extending life of Alaska’s Pogo mine.

-Pogo mine purchase in Alaska well-received
-Analysts upgrade ratings and target price
-Key to future is proving up resources and reserves, boosting productivity, cutting costs

By Nicki Bourlioufas

Northern Star Resources ((NST)) announced on August 30 that it has agreed to pay Sumitomo US$260m for the Pogo shallow underground gold mine in Alaska, which produces 250koz of gold a year. The transaction will be funded from existing cash and a $175m placement at $6.70 a share.

Northern Star shares closed at $6.96 a share the day before the announcement but have since jumped to as high as $8.32 on positive sentiment about the purchase.

Analysts responded positively to Pogo’s quality, scale and location, and suggested Northern Star has the expertise needed to make a success of the operation. Several made comparisons of Pogo to the Jundee mine in Western Australia, which the miner acquired in 2014 and has since extended and upgraded through exploration and productivity improvements.

Citi and Canaccord Genuity both raised their ratings to Buy, with target prices of $8.25 and $8.20 respectively. UBS rated Northern Star a Buy with a target of $8.00, up from $7.50, saying the valuation reflects the highly defensive nature of gold equities as an asset class.

Ord Minnett was more cautious, upgrading the stock to Overweight but setting a target price of $7.50. Credit Suisse was most conservative, maintaining its Underperform rating and raising its target price to $6.10 from $5.45, below the placement price and the market price.

Analysts at Deutsche Bank equally prefer to remain cautious, sticking with their Sell rating, while lifting the price target to $6.40 from $5.90 as the Pogo acquisition should be immediately accretive.

Pogo mine takes Northern Star Resources global

Citi suggests Northern Star's purchase looks like a good acquisition, labeling Pogo as affordable and value accretive to earnings. Plus the mine sits in the operational sweet spot of high-grade underground mining in a low-risk jurisdiction. As a bonus, this purchase will make Northern Star a global gold producer.

Cannacord Genuity sees the move as providing a cheap entry price to a world class asset of considerable scale, in a highly regarded jurisdiction. The broker believes the jurisdiction and compelling value of the acquisition more than offset any potential negative connotations that may be associated with venturing out of Australia.

The Fraser Index rates Alaska as a Tier-1 jurisdiction for mining. Cannacord reminds investors there is already a strong mining presence in the area, with Barrick, Kinross, Agnico Eagle, Teck and South32 ((S32)) all active in the state.

Credit Suisse, too, likes the acquisition. The broker notes it transforms Northern Star into Australia’s second largest listed gold producer, ahead of Evolution Mining ((EVN)). The Pogo mine produces gold at an average of 12.2 grams per tonne and has a resource of 4.1 million ounces.

UBS believes the acquisition adds to an already impressive organic growth platform. The UBS analysts state Pogo fits within Northern Star's underground mining and exploration expertise and has potential to add significant value. Northern Star's current Enterprise Value is about $4bn on a production base of about 700koz a year, and the acquisition will increase the production base towards 1Moz a year.

Ord Minnett is of the view this is a situation where the acquired asset is genuinely worth more in the bidder's hands. The analysts valued Pogo at $576m or 90cps.

Northern Star aims to make Pogo another Jundee

UBS observes Northern Star's management sees Pogo as a potential repeat of the Jundee mine, which UBS rates as a very successful acquisition. The miner bought Jundee for $83m from Newmont in 2014 when it appeared to be close to the end of its life. The company revitalised the mine through exploration and a lift in productivity, which together extended mine life and justified an expansion of the plant. UBS now values Jundee at $1.3bn.

Analysts agreed the key to getting value out of Pogo will be for new owner Northern Star to extend the mine’s life through exploration and the conversion of resources to reserves. UBS believes Pogo right now has a mine life of about two years left, based on reserves.  This short apparent mine life also explains the low acquisition cost compared to the existing production base.

Credit Suisse also considers Pogo as an analogue of the Jundee operation with opportunity to materially grow resources and reserves through intensified exploration, and to optimise operations by increasing productivity and production and reducing costs. The Credit Suisse analysts believe Pogo has been a fantastic mine so future growth in reserves is key.

The FNArena database of stockbroker ratings currently shows three Buys (or equivalents) for Northern Star, including two upgrades post the announcement, with one broker on Neutral and one on Sell.

Canaccord Genuity is not included in the database.

Target prices range from $6.10 (Credit Suisse) to $8.25 (Citi) for an average of $7.29.

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