Northern Star buys Jundee Gold Mine

Northern Star’s buying spree continues. The one-time mining minnow has announced another purchase, its fifth in 12 months, this time buying the Jundee Gold Mine in Western Australia from Newmont. Jundee is the fifth largest mine in Australia and has produced gold for more than two decades. It will propel Northern Star’s output from 350,000 to 550,000 ounces a year, making it the second-largest gold miner in the land.

Northern Star will pay $82.5m for Jundee, which last year produced 279,000 ounces of gold. The mine is expected to produce more than 200,000 ounces per year for another 2-3 years. As a mature mine, it will require significant exploration to raise reserves, which now sit at just 400,000 ounces. Despite this, Northern Star has secured another bargain. Even if no further exploration takes place, we estimate two years' production will generate a net present value of over $100m in today’s dollars. In effect, the company has acquired a free option to raise output. Jundee hosts complex geology and is not a straightforward operation, but management believes it can still extract years of output from the ageing mine.

To fund the purchase, Northern Star will take on $100m in debt, which doesn’t appear excessive for such a large production base. At current prices, the company should generate over $150m in earnings before interest and tax. Although not as cheap as its peers, we are impressed by the bold, contrarian measures taken by management. They have bought decent assets at cheap prices. With higher earnings potential, we’re raising our recommendation guide but caution that a portfolio approach to the sector, as we recommended in AU, check out this gold portfolio, is best. The share price is up 33% since Northern Star issues SPP (Speculative Buy – $0.90). SPECULATIVE BUY. 

Note: The Growth portfolio owns shares in Northern Star Resources.