|Summary: Northern Star is emerging as a new star of the Australian gold sector, with a pile of newly acquired assets – and stands to benefit from a rising US dollar gold price, a lower Australian dollar – or both.|
|Key take-out: Analysts expect the company to outperform the market, and to continue its policy of paying consistent dividends.|
|Key beneficiaries: General investors. Category: Shares.|
|Recommendation: Outperform (under review).|
Early birds sometimes get the worm, which is the theory being applied by Northern Star Resources (ASX: NST) as it wraps up a series of deals that will catapult it up the ranks of Australian gold producers.
If the Western Australia-focussed miner has got the timing right it stands to benefit from a combination of either a recovery in the US dollar gold price, a continued decline in the Australian dollar – or both.
Gold is showing signs of stabilising around the $US1,200-an-ounce level, which is the global production cost of the metal according to an analysis by Precious Metals Insight, a London-based consultancy. Meanwhile the Australian dollar is expected to weaken further, which will increase the Australian-dollar gold price.
Over the past 12 months the currency effect on gold has been significant, with the Australian dollar price rising from less than the US price to substantially more.
The latest US gold price of $US1,255/oz rises to $A1,426/oz on conversion at an exchange rate of US88 cents.
For investors with an appetite for gold and a belief that it is an oversold asset class, that makes the dividend-paying Northern Star a buy. Indeed, some analysts see the stock as capable of delivering a 45% capital gain over the next 12-months.
To deliver that result, which would require a rise from its current 89.5c to the $1.30 forecast by analysts at the stockbroking firm Hartleys, Northern Star will need to quickly bed down three WA mines it has acquired from one of the world’s biggest miners, Canada’s Barrick Gold. Other analysts are less optimistic. Macquarie sees $1 as a target price, or up a modest 11.7%.
Despite the big gap in the price targets, both Macquarie and Hartleys rate Northern Star as a stock that will outperform the market. They both also see Northern Star maintaining its policy of paying consistent dividends, with 3.5c a share distributed last year. If it makes the same payment this year, the stock is trading on a prospective yield of 3.9%.
However, the share-price target gap also reflects a combination of the uncertainty that always affects gold and currency moves, and the challenges facing the company as it undertakes a three-fold boost in annual production from around 107,000 oz of gold a year to more than 350,000 oz from next year.
At its new level, Northern Star will rise from 13th in the pecking order of ASX-listed goldminers to fifth, overtaking stocks such as Kingsgate, Silver Lake, Beadell, Perseus and St Barbara.
With a targeted “all-in sustaining” cost of future production of $1,050/oz ($US924/oz) Northern Star should generate a reasonable gross profit of around $376/oz using today’s Australian gold price of $1,426/oz.
What Northern Star has effectively done is seize an opportunity to expand rapidly ahead of what is expected to be a fresh round of gold-sector consolidation.
Until late last year the company was a “one-trick pony” with only one operating mine, the Paulsens project in the Pilbara region of WA. It has an annual output of between 100,000 and 115,000 ounces of gold a year at an all-in sustaining cost of between $900 and $1,050/oz.
Just before Christmas Northern Star acquired the Plutonic mine from Barrick for $25 million, adding around 80,000 oz a year to the company’s output.
Significantly, Northern Star’s chief executive, Bill Beament, and a number of other senior staff at the company had worked at Plutonic and have strong ideas about improving its productivity.
The same argument of management compatibility is being mounted with the latest $75 million acquisition of the Kanowna Bell goldmine from Barrick, and 51% of the East Kundana Joint Venture which includes the Raleigh and Rubicon mines and the recently discovered Pegasus orebody.
Northern Star has been quick to cover the cost of asset acquisitions, raising the required $100 million in an oversubscribed share issue which was snapped up at 86c a share. This was a 9.7% discount to the price before the placement, and a few cents below the stock’s recent price of 89.5c.
The rush by Northern Star to grow can be partly explained by opportunity. Barrick is cutting its exposure to Australia, putting mines up for sale that were once regarded as icons of the industry.
A second factor is that Beament has attracted a team of seasoned goldmining professionals with a reputation for focussing on the financial performance of assets rather than simply producing ounces of gold.
Their hands-on style turned Paulsens from a poor performing mine under its previous owner, Intrepid Mines, into a solid profit generator that continues to expand, thanks to well-targeted exploration drilling close to the existing operations.
Plutonic and Kanowna Belle, with a modest amount of capital investment, could yield the same result, while the Pegasus discovery is certain to add ounces and years to the life of the East Kundana Joint Venture.
Beament is confident that he has not bitten off more than Northern Star can chew, and equally confident that the 350,000 oz of annual (and profitable) production will put the company on the radar screen of international investors.
“The East Kundana JV acquisition makes Northern Star a major Australian goldminer that will appeal very strongly to major global investors,” he said.
“The transaction ensures that Northern Star meets the demands of domestic and international investors with respect to critical mass, multiple operations, low costs, consistent dividends and strong growth prospects.”
- On the sidelines of the latest Northern Star deal are questions about trading in the stock by one of its biggest shareholders, Investmet, a company associated with a former Northern Star director, Mike Fotios. Investmet sold 4 million Northern Star shares at 95c in the days before the latest asset acquisitions and capital raising priced at 86c.