The electric-powered, skateboard-riding Bill Beament, executive chairman of Northern Star Resources (NST), should take a passing interest in American cartoonist Walt Kelly’s character, Pogo.
Kelly’s Pogo character’s home spun philosophy of ‘looking back on things, they always improve’, and ‘we are confronted with insurmountable opportunities’, would resonate with NST’s corporate philosophy, having bought the eponymous 4.1 million oz. Alaskan gold mine for $US260 million last year from Japan’s Sumitomo Metal. Also, it fits well with Beament’s go hard or go home style of doing things.
The Pogo mine acquisition is a Tier one global gold asset, of which there are only 17, producing on average 300,000 ounces a year. It has the third highest reserve grade in North America of non Jorc reserves and resources of 4.1 million ounces at 12.1 grams per tonne – and this reserve has been maintained despite depletion. Northern Star paid the equivalent of $USD63 an oz. for the asset and it immediately adds 250,000-260,000 to NST’s FY19 production guidance.
Two things put NST firmly in the investment cross hairs. Firstly, the gold price. Currently around $AUD1850 an oz. NST has a big operating margin over its AISC (all-in sustaining cost) of $AUD1,175, across all operations. And depending to which deluded gold bug, end of earther you spoke to last, the gold price is in its ascendancy somewhere between here and the moon. Gold fundamentals largely are technically driven – it’s all about chart moving 50 and 200 day averages, golden crosses, currency valuations and a good measure of crack pot conspiracy theory. NST hedges about a third of its 850,000-900,000 oz. annual production, a sensible precaution against gold vagaries.
At this production level, and not accounting for any POGO improvements, NST is literally a cash cow. NST finished the DecQ’18 with cash, bullion and investments (~A$40m) of A$291.7m. And the next 12 months should see NST generate over $500 million in free cash flow. Which potentially gives it a hunting acquisition war chest liquidity of more than $1 billion. At some point NST will get off the M and A acquisition campaign. And the motivation for that may be if gold assets become too expensive. NST is not a great dividend payer, but there is a not too far away time when cash will start to flow back to shareholders in higher dividends.
Secondly, being a cash rich miner, it is a case of the hunter or the hunted. NST’s market cap of $5.5 billion pales in the knock-down-drag-em out global takeover between gold miners Newmont and Barrack.
Barrick Gold’s hostile $US17.8 billion ($24.8 billion) takeover offer for Newmont Mining has been rejected. And if the deal gets up Barrack will sell Newmont‘s Australian gold assets. Beament would love to get NST’s hands on these assets which generate about $750 million a year in free cash flow. But this comes with a valuation of sticker of more than $6 billion. It’s a big ask. Probably too big. But other large global miners will be playing the game of this goes with that of Newmont and NST. And this could just see a fully price NST takeover bid emerge around the $11-12 share price level.
Beament and his management team exercised discipline and stuck to their knitting buying Pogo. Like NST’s Australian gold assets, Pogo is part of a much larger mineralised belt some 200km wide and 1200 km long. While the previous owners seemed content running the mine and plant at capacity, Beament and his team have eyes on the bigger prize of this region the Yukon, where over 50 million gold oz. have been defined in the past 20 years. The configuration of Pogo is similar to NST’s Jundee assets which gives NST and inside running on understand the regions geology. Major miners like Barrick Teck and South 32 and Newmont are in the region. Expect more news on exploration from NST on further Pogo finds.
Currently NST’s share price is tracking around $9.00. And I wish I had followed one my co-panellists advice on the old Your Money Your Call – when Tony Locantro told me to buy NST when it was about 10 cents. Locantro is a well-known picker of junior gold and mining stocks.
The market is somewhat divided on NST’s future share price. Some analysts think it has run too hard. Others have valuations of between $10 and $11 a share. There definitely is big upside in Pogo.The market is however worried about change implementation affecting production. And potentially sees some impact on second half earnings. For the December half NST reported a profit of $89 million and EBITDA of $217 million. My thinking is there is significant earnings growth in the next 2-3 years where if NST gets the execution of Pogo right the EBITDA line could increase by about 50%.
The attractive earnings/balance sheet profile will also attract overseas attention to NST. While NST may look expensive short term remember you are buying quality assets coupled with top tier management. The two combinations needed to deliver higher shareholder returns that are if the gold price behaves itself!
And for those who like the penny dreadful, one of Tony Locantro’s recent picks is Torian Resources – a tiny market cap trading about 2 cents. Its claim to fame is nearology – having made some early gold mineralisation discoveries at Paradigm South, which happens to be adjacent to the Northern Star Paradigm find. So I am following Tony’s nose on this one! And a topic for another time.
By Kim Slater