A mine is only as good as its supporting infrastructure. Northern Star Resources has played to its strength by giving the go-ahead to expand its KCGM mill to 27mtpa, elongating the life of the Super Pit and opening the door to other adjacent projects.
For $1.5bn over a three-year build and a two-year ramp-up, the KCGM mill will be expanded to 27mtpa (from 13mtpa) by FY29. The project is expected to deliver a sustained lower cost base and will reduce milling costs by $7/t from ~$24/t. The mill expansion effectively replaces and modernises 80% of the existing plant for a low capital intensity of ~$6,000 per ounce.
The expansion will effectively add about 250koz pa of gold production in the medium term.
Feeding the mill will be from multiple sources. The open pit will contribute 6-12mtpa with the underground mine providing 4-8mtpa. NST has stockpiled ore that will contribute 8-10mtpa. The variety of ore feeds will allow NST to optimise feed to control yield output.
KCGM is NST’s largest asset with a Mineral Resource of 28.3Moz (50% of NST) and an Ore Reserve of 12.2Moz (60% of NST). The mill expansion will enable NST to produce 900koz pa of gold from FY29 (486koz FY22) at an AISC of A$1,425/oz (FY22 $1,633/oz, FY23 guidance $1,730-1,760/oz).
The Mineral Resource supports a mine life in excess of 20 years at KCGM at the expanded processing rate. It will mean that NST must convert more of its resource by further developing the open pit and eventually the underground mine at Fimiston North.
While the existing resources are well understood, the project is subject to execution risk. NST noted the capex total includes a 10% inflation factor and contingencies.
The ~9km ‘Golden Mile’ in Kalgoorlie will, all other things being equal, jump into the top five gold mines in the world when it reaches full production.
Importantly, the mill expansion will not interrupt operational cash flow during construction and project approvals are in place.
Funding for the expansion will come from existing cash, forecast cash flow and existing debt facilities. NST will not change its dividend policy (20-30% of cash earnings).
Investment View
NST has a high quality portfolio of assets capable of delivering production growth, margin improvement and high-returning brownfield investment. The company has various opportunities to expand existing assets and make acquisitions and/or capital management decisions.
With an average mine life over 10 years and a solid track record of resource development, NST is poised to generate very healthy cash margins and free cashflow.
NST is targeting gold production to reach 2.0Moz by FY26f from approximately 1.6Moz in FY23f. The KCGM mill expansion will add ~250kozpa when fully operational in FY29f.
Three key catalysts will drive the share price: (1) a mill expansion at KCGM to access the large stockpile of ore and improve efficiency (now underway) (2) the Pogo expansion in Alaska and (3) further opportunities for acquisitions and capital management.
At 6.4x EV/EBITDA, NST is trading close to the Australian and international average multiple of 7.0x but has a superior outlook for free cash flow yield, in our view.
Risks to Investment View
Development and execution risks of expansion projects are key factors. If the global economy avoids a protracted or severe downturn (recession), the gold price may underperform.
Recommendation
We have retained our Buy recommendation.
