Northern Star Resources Ltd

Company Overview: Northern Star Resources Ltd (ASX: NST) is an Australian gold production company with a portfolio of high-quality, high-margin underground and open pit gold mines in Australia and North America. Notably, the company owns and operates three world-class gold production centres: Kalgoorlie, Yandal, and Pogo, located exclusively in world-class locations. The company is mainly involved in the exploration, development, mining and processing of gold deposits and sale of refined gold derived from its production centres. The company was listed on ASX on 17 December 2003.

NST Details  

Key takeaways From FY21 Results: In line with its strategy of building a strong asset base through strategic acquisitions, NST completed the merger with Saracen Mineral Holdings Limited (SAR) in February 2021, creating NST into a new, high-quality large-cap player in the Australian market. This helped the company in achieving record production and earnings in FY21 with both full year production and all-in sustaining costs (AISC) per ounce meeting FY21 guidance.

• Rise in Gold Revenue: For the year ended 30 June 2021, NST reported gold revenue of ~$2.8 billion, up 40% on the last year, mainly driven by 3% YoY increase in average realised gold price per ounce and a 33% increase in gold sold.
• Increase in Cash Earnings: NST’s cash earnings grew by 10% YoY to $648 million, reflecting the cash-generating strength of the business.
• Rise in Dividend: For H2FY21, NST has paid a final fully-franked dividend of 9.5 cents per share, taking the full-year dividend to 19.0 cents per share, which is 11% higher than FY20.
• Rise in Statutory NPAT: Statutory NPAT for FY21 stood at $1,032 million, up 300% on FY20, mainly due to the recognition of $1,919.2 million non-cash gain in respect of the fair value remeasurement of the company's premerger 50% stake in KCGM.
• Rise in Cash Balance: As at 30 June 2021, the company had cash and cash equivalent of $771.9 million, up from $677.3 million as at 30 June 2020.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Metrics: For FY21, NST’s net margin stood at 37.4%, up from 13.1% in FY20. Gross margin for FY21 stood at 20.9%, down from 26.6% in FY20. EBITDA margin for FY21 stood at 40.6%, slightly up from 39.9% in FY20. ROE for FY21 stood at 20.4%, up from 15.9% in FY20. Current ratio for FY21 stood at 2.38x, up from 1.74x, demonstrating that the company has improved its ability to pay short-term obligations. Debt to Equity ratio for FY21 stood at 0.11x, down from 0.38x in FY20.

Profitability Metrics and Liquidity Profile (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 28.14% of the total shareholding, while the top four constitute the maximum holding. BlackRock Investment Management (UK) Ltd. and Van Eck Associates Corporation are holding a maximum stake in the company at 7.54% and 5.66%, respectively, as also highlighted in the chart below:

Source: Analysis by Kalkine Group           

Recent Developments:

• Central Tanami Joint Venture Transaction Completed: Recently, Tanami Gold NL (ASX: TAM) transferred 10% joint venture interest in the Central Tanami Project to Northern Star Resources Limited, for a A$15 million cash payment. NST and TAM will jointly fund all exploration and development activities on the Central Tanami Project Joint Venture.
• Board Changes: On 22 September 2021, the company notified that Raleigh Finlayson has resigned as an Executive Director of the Company. On 23 August 2021, the company had informed that Tony Kiernan, Lead Independent Director, will retire at the Annual General Meeting on 18 November 2021.              

 Key Risks:

• Foreign Currency Risk: NST operates internationally and is exposed to foreign exchange risk arising from foreign currency transactions, primarily with respect to the US dollar.
• Gold Price The company is also exposed to the risks related to the fluctuations in gold price as it could impact its financial results.
• COVID-19 Uncertainty: NST is exposed to the uncertainties and risks related to the COVID-19 pandemic and its associated restrictions as it could impact the productivity of the company’s operations.

Outlook: NST expects that the merger with SAR will unlock geographic, operational, and strategic synergies that will deliver value for all stakeholders. Notably, the combined operations of NST and SAR are expected to reach an annual production rate of 2Moz by FY26. For FY22, the company expects its gold production to be in the range of 1.55-1.65Moz at an AISC of A$1,475-1,575/oz. Notably, the production is weighted towards the second half of FY22, driven by increasing grades at Yandal and increasing mining rates at Pogo. NST intends to release its Q1FY22 results on 19 October 2021.The company is planning to hold its next Annual General Meeting (AGM) on 18 November 2021.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by ~8.09% and is trading lower than the average 52-week price level band of $7.955 and $17.03, offering a decent opportunity for accumulation. The stock has been valued using EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium to its peers, considering the decent asset base, expected benefits of the merger with Saracen, and modest production outlook. For the purpose of valuation, peers such as Sandfire Resources Ltd (ASX: SFR), Evolution Mining Ltd (ASX: EVN), IGO Ltd (ASX: IGO), etc., have been considered. Considering the company’s improved FY21 financial and operations performance, increasing cash balance, decent long-term outlook, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $9.10 as on 5 October 2021, 11:00 AM (GMT+10), Sydney, Eastern Australia).

NST Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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