The fourth quarter and fiscal 2021 earnings season for the Gold Mining Index (GDX) is finally drawing to a close, and one of the first to report results is Northstar Resources (OTCPK:NESRF). Overall, the company delivered solid quarterly results in the second quarter of fiscal 2022 (Q4 2021), reporting sales of approximately 393,000 ounces of gold, quarterly revenue of A$950 million, and a slight improvement in overall sustaining cost margins sequentially Base. However, the true story of Northern Star is its growth, which could exceed 2 million ounces per year in fiscal 2026. Given the favorable combination of production growth and higher margins, I see any pullback below $6.95 as a low-risk buying opportunity.
Northern Star trades heavily on the Australian Securities Exchange (NST.ASX) on a daily basis but has very limited volumes on the over-the-counter market. Therefore, the best way to trade shares is on the Australian Securities Exchange. There are significant risks in over-the-counter trading due to wide bid-ask spreads, low liquidity and no guarantee of future liquidity. All figures in this article are in Australian dollars unless otherwise stated.
Northern Star Resources (“Northern Star”) released its fiscal 2022 second quarter results (calendar year 2021 fourth quarter results) earlier this year, reporting quarterly gold production of approximately 388,600 ounces, up 4% sequentially. The higher production was driven by another solid quarter at the newly consolidated KCGM (Australian Super Pit), another strong quarter at Carosue Dam and higher production at Pogo, although the asset was well behind full-year guidance. Let’s take a closer look at the quarter below:
As the chart above shows, Northern Star is off to a good start to fiscal 2022, with production of approximately 762,000 ounces in the first half of 2022 and gold sales of approximately 780,000 ounces in the second half of the year. Given that production is back-weighted, higher mining rates at Pogo and higher grades at Jundee are expected, putting the company on track to hit the midpoint of its guidance of about 1.6 million ounces of gold this year.Although the cost is above the guidance of A$1,613/oz [US$1,194/oz]we should also see an improvement in the cost of H2.
Looking at the individual businesses, it was clear that this was another solid quarter for KCGM, which contributed approximately 131,700 ounces, the second-best quarter since the Saracen/Polaris merger. This was aided by higher throughput at higher grades, with approximately 3.57 million tonnes of gold at an average grade of 1.4 g/t. Meanwhile, quarter-on-quarter production also improved at Carosue Dam, up more than 3% to approximately 67,400 ounces.
Similar to KCGM, this was driven by higher throughput, with a recently completed plant expansion to 3.2 million tonnes per year. It is clear from the production results (approximately 1.02 million tonnes processed) that the plant is operating well above nameplate capacity and is on track to process over 3.8 million tonnes this year at the current pace. Moving south to Kalgoorlie, production dropped sharply to around 43,100 ounces, during which time much lower grades were mined (2.5 grams per tonne of gold). Fortunately, KCGM and Carosue Dam not only filled the gap at the Kalgoorlie production center, with a combined production of approximately 244,000 ounces.
At the Yandal production hub, which was a weak quarter, Jundee production fell to about 69,200 ounces and Thunderbox production fell nearly 2% sequentially to about 31,500 ounces. However, ignoring the headline figure of a roughly 7% sequential decline in production, the Thunderbox factory expansion is still on track for the first half of 2023, with a record shutdown in the current quarter. Meanwhile, Jundi also reported a record quarterly development progress of 6,800 meters. Net mine cash flow was flat in the second quarter of FY22 despite higher operating costs and capital expenditure (A$77 million in growth capital).
Finally, at Pogo in Alaska, the asset had another weak quarter, although production did improve on a sequential basis. As the chart below shows, production increased by more than 10% sequentially (approximately 45,700 ounces), but compared to simple competition. This was due to a 24-day shutdown in the first quarter of fiscal 2022 due to the coordination and commissioning of the processing plant. During the second quarter of fiscal 2022, Pogo processed approximately 255,100 ounces of gold at an average grade of 6.6 grams per tonne, with a significant increase in throughput as the plant expanded to 1.3 million tons per year, but at lower grades.
While it is clear that production is down significantly from year-ago levels (Q2 FY21: approximately 53,400 ounces), it is important to note that the second half of the year for offshore gaming will be much better and costs will drop significantly in the second half. Notably, while production fell year-on-year, the extraction rate improved in December to 1,470m. Unfortunately, costs rose sharply, partly due to fewer ounces being sold, with costs up more than 20% year over year to $1,735/oz. Pogo was tracking miles past the midpoint of its guidance of about 235,000 ounces by the end of the first half, and has only produced about 90,000 ounces so far this year.
The good news is that the sharp drop in COVID-19 cases in Alaska and the easing of border restrictions in Western Australia should help the business move forward (expat travel availability), with the goal of significantly increasing mining rates in the second half of 2022 (January to June). Given that Pogo continues to drive up Northern Star’s operating costs, with total sustaining costs well above the industry average, growing to 300,000 ounces per year at a much lower cost will help improve the company’s cost profile relative to its peers. At present, the expansion of the plant to 1.3 million tons/year has been completed, and the next key will be to maintain the development speed of 1,500 meters per month (almost achieved in December).
Turning to costs and Polestar’s ASP, we can see costs increase QoQ in Q2 FY22, from A$1,594/oz (Q1 2022) to A$1,631/oz. The company found higher costs at Carosue Dam, Kalgoorlie and Jundee, which processed much lower grades, offset by a very substantial cost of A$1,344/oz at KCGM. Fortunately, the company benefited from higher average realized gold prices (A$2,429/oz vs. A$2,345/oz), so AISC margins improved by more than 4% to A$798/oz. Northern Star should see significant margin improvement in the second half of 2022, given the strength of gold prices and back-end weighted production/sales.
Let’s take a look at Polaris’ financial performance below. As you can see in the chart below, we can see quarterly revenue improve to A$950 million, supported by a 2% quarter-on-quarter increase in volume and a higher average realized gold price. Notably, lower ounces sold to hedges during the period also benefited revenue, with approximately 197,000 ounces delivered in Q1 2022 compared to approximately 117,000 ounces delivered in Q2 2022. Based on the higher average realized gold prices so far in the third quarter of fiscal 2022 (March quarter) and expectations for increased production, we should see another quarter of revenue in the next quarter.
Turning to quarterly net mine cash flow and growth/exploration capex, Northern Star also had a solid quarter. This was evidenced by net mine cash flow of A$175 million in the second quarter, despite significant expenditures in the quarter (A$173 million). Year to date, Northern Star has generated operating cash flow of A$622 million and EBITDA of A$926 million. The increase in revenue and cash helped the company improve its balance sheet, with cash and bullion of A$588 million in the first half of 2022, up from A$345 million in the same period last year, and total liquidity of A$1.29 billion.
The two negatives to report this quarter are the ounce hedging again, with the company adding about 405,000 ounces to its hedge book at an average price of A$2,506/oz [US$1,854/oz]. This is significantly lower than the current gold price, and while this is in line with a strategy employed by many gold producers, Northern Star has had a slightly less impact on gold price increases than many of its peers. Notably, this is only 20% of gold production in fiscal 2024, but it’s still a significant portion of annual production compared to the 0% hedge for most MIO producers.
Another negative is that Osisko Mining (OTCPK:OBNNF) has announced that it will continue working at Windfall without the Northern Star, eliminating a good boost to growth outside of the company’s current growth plans. This is because Windfall looks set to produce more than 330,000 ounces of gold in its first few years of production, which would translate into a production increase of almost 8% for Northern Star, assuming a 50/50 joint venture. Even without the windfall, Northern Star’s growth is still impressive. Nonetheless, for a slightly higher cost producer (AISC: ~$1,130/oz), adding AISC mines below $700/oz would certainly improve margins significantly.
Valuation and technical picture
Based on about 1.17 billion shares outstanding and a share price of $7.85, Northern Star has a market capitalization of about $9.2 billion, a very reasonable valuation for a company that produces about 2 million ounces a year. This is especially true given that Northern Star is arguably the best jurisdiction in the industry, with 100% of production coming from Tier 1 jurisdictions, and one of the few 1.5+ moz producers expected to grow 25% by 2025 correct. Assuming the company is able to deliver on its growth plans, I wouldn’t be surprised if the stock trades above $10.50 over the next 18 months, implying over 35% upside from current levels.
However, while Northern’s valuation below 1.20x P/NAV is quite reasonable, since I noticed the stock dipped into low-risk buy territory below $6.60 in January, the stock has come a long way from its lows rebound. In fact, the stock has risen 30% from those lows in less than 40 trading days. This reduces short-term reward/risk, with the stock now facing potential downside support at $1.65 ($6.20) and upside resistance at just under $1.00. So with the current reward/risk ratio of 0.61 to 1.0, I don’t think this is a low risk buy point from a trading perspective.
For Polaris to return to favorable buy territory, the stock would need to drop to $6.95 or lower, at which point the reward/risk ratio would improve to about 2.5 to 1.0. Given the recent strength in gold prices, a drop of this magnitude may not happen, but I prefer to buy when stocks are hated, and I’m very strict with my preferred buy points. So if I want to add to a position in the stock or start a new one, this will be an area I’ll be watching closely.
Northern Star had a solid first half, selling about 780,000 ounces in the first half, and the company remains on track to meet its guidance of about 1.6 million ounces in fiscal 2022. If we look to the next few years, the combination of increased production and lower costs should translate into meaningful growth in earnings. Notably, its target of around 2 million ounces appears to have some upside. Given the favorable combination of higher profit growth output and an attractive dividend framework, I see any pullback below $6.95 as a low-risk buying opportunity.