Northern Star fires up

Commodity prices tend to crash with a bang but rise quietly. So it is with gold which has breached $1,500 in Australian dollar terms without too much notice. At this price, decent margins are on offer for the right miner. One of these is Northern Star Resources.

Last year Northern Star went on the offensive while others were pulling in their horns, raising capital amid crumbling gold prices and buying five mines from larger gold miners looking to shrink. Management had previously worked on the assets and were familiar with them while desperate sellers gifted the company a series of bargain buys.

That strategy – taking on debt to buy assets amid panic – is now paying off.

Last week the miner announced a stellar quarterly result, confirming that more than 290,000 ounces of gold have been produced over the past six months, generating free cash flow of over $100m. Debt has been reduced and the company is on track to generate more than $200m in free cash flow and pay another dividend when it announces full-year results.  

Drilling success

Operating results were merely one highlight. The other was spectacular drilling that will help the miner extend a rather short mine life.

Drilling around the original Paulsens mine returned one intercept that ran for 7m at 118g per tonne. For those uninitiated in reading results, this is a bonanza and increases the probability that the Paulsens mine can continue to produce at low cost. Northern Star will update gold resources at Paulsens in the middle of the year.

The company is generating enough cash to reinvest in exploration, repay debt and pay another dividend this year. Despite our best efforts, we are fast becoming smitten with management who are running a gold miner as a business and not a hobby.

Lone star

Northern Star has been a lonely highlight in our gold 'mini-portfolio' which has otherwise failed to fire (so far). With the share price up more than 170% since our initial buy in AU, check out this gold portfolio (Speculative Buy – $0.81), the performance of this single stock flatters the portfolio's returns. Fortunately with investing, the magnitude of success is at least as important as its frequency.

Following such a sharp increase in price, we're downgrading Northern Star and will be watching full-year results with great interest. We're not far from selling but further resource expansion might change that call. For now, we recommend you HOLD.

Note: Our model Growth Portfolio owns shares in Nothern Star.

Disclosure: The author owns shares in Northern Star.