Gold equities, by their very nature, depend on the price of gold as a key driver of value and earnings. But being equities, they also depend on good management and investment. This overlays the gold price in determining our recommendation on Northern Star Resources.
In our view, the best gold producers create value independent of the gold price. They do this by reinvesting in existing resources, generating high-return production growth of mine life extensions, or through smart acquisitions.
Secondly, a strong emphasis on ‘cash-all-in-costs’ and free cashflow generation are better measures of success than simple production and ‘all-in-sustaining-costs’.
Finally, as Central Banks around the world move closer towards easing monetary policy, gold becomes a more attractive asset class and a hedge against economic uncertainty. We think a long term gold price of US$1,900 per ounce equates to a US 10-year real rate of about 1.5%. As the cost of extraction and grade decline happens over time, the natural price of gold will rise. In five of the last seven recessions, gold has delivered positive returns as a safe-haven asset compared to other risk assets.
In the current environment, we see an opportunity to own Australian gold producers that can manage margins and make judicious investment decisions.
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.
Three key catalysts will drive the share price: (1) a mill expansion at KCGM to access the large stockpile of ore and improve efficiency (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 initiated our coverage of NST with a Buy recommendation.
Northern Star Resources (NST)
NST is best known for its ‘Golden Mile’ assets in Kalgoorlie including the Fimiston ‘Super Pit’. The cornerstone KCGM asset will deliver most of NST’s production growth to 2.0Moz by FY26f (1.6Moz in FY23f) courtesy of access to higher grade open pit feed following investment in waste stripping over the next two years. KCGM is accumulating significant stockpiles of ore and is considering a big expansion of mill capacity from 13mtpa to 24mtpa, subject to a final investment decision due in 1H24f. KCGM has reserves of 281mt at 1.3g/t and reserves of 11,926koz of gold.
Figure 1: NST OPERATIONS
NST’s other Australian assets are Carosue Dam, other Kalgoorlie operations, and Yandal (Jundee and Thunderbox). The latter is ramping up its 6.0Mtpa mill expansion that will deliver substantial cost savings of about A$100/oz, improving margins and unlocking the economics of satellite deposits in the region.
The Pogo (Alaska) acquisition in 2018 has underperformed until recently and is on track to become a 300koz pa producer in FY24f. If the improved margins and production can be sustained, further development is possible.
NST has an average mine life of more than 10 years at an annual production rate of 2.0Moz. The statistics are much higher at KCGM alone. NST has a solid track record of resource development and is poised to generate very healthy cash margins and free cashflow.
A $300m buyback in FY23 is yet to complete ($127m to date). The company has sufficient balance sheet capacity to consider further capital management and undertake its capex programs.
The gold price is up nearly 10% since the beginning of 2023 while NST has increased 23% in the same time (Newcrest Mining +44%, Evolution Mining +18%). The outperformance also compares well against the ASX200 which is up 3.8% in that timeframe.
Figure 1: GOLD PRICE US$/OZ
Gold equities have responded to rising interest rates and the potential for economic slowdown. For NST specifically, the company has improving operational execution across the portfolio, an on-going cash build enabling capital management and project expansion, the most important being the KCGM mill expansion.
Figure 2: PRODUCTION
Figure 3: AVERAGE PRICE AND COST PER OUNCE
NST’s expansion towards 2Moz pa simultaneously increases production and lowers its average cost of production as efficiency of scale contributes. The resulting cashflows are what makes the stock attractive despite the apparently high valuation metrics of PE ratio and EBITDA multiple.
Figure 2: PE RATIO
Figure 3: EV/EBITDA
