Company Overview - Northern Star Resources Ltd is a gold producing and exploration company. The Company is engaged in mining of gold deposits at Paulsens; construction and development of extensions to existing gold mining operations at Paulsens Gold Mine, and exploration and development of gold deposits in the Ashburton region of Western Australia. The Cheroona Project is located 70 kilometers north of Meekatharra in the Murchison Mineral Field, Western Australia. The Beatty Park Project is located 30 kilometers to the North West of Cheroona and consists of one tenement application. The Red Billabong project consists of one exploration licence and is located 45 kilometers southwest of the regional centre of Halls Creek, in the Kimberley Mineral Field of Western Australia. In July 2014, Northern Star Resources Limited completed the acquisition of the Jundee Gold Mine from Newmont Mining Corporation.


Analysis - Northern Star Resource (NST), the second-biggest ASX-listed gold miner by production and market cap (A$719M), appears to be in the limelight. With FY14 results out, the Company reported a production of 550-600,000ozpa. NST with its five operating mines in Western Australia is doing well. It has grown tremendously from one mine and 100,000ozpa in the past year.


Financial Overview (Source – Company Reports)

With acquisition of Jundee from Newmont Mining, and Plutonic, Kundana and Kanowna Belle from Barrick Gold in 2014, NST seems to excel as opposed to many of its peers. The total JORC Resources entail reserves of 6.2Moz. The other highlight is A$50M exploration/drilling budget set for FY15 to grow mineral inventory. The Company’s fully-franked dividend was of A3.5c for FY14 with ~3.9% gross yield. It has paid out over A$45M to shareholders since July 2010. Cash and investments were A$83M, and bank debt was A$50M (as at September 2014).


A Global Mid-Cap Gold Miner (Source – Company Reports)

NST has gradually developed good market confidence based on its asset optimization strategy and value adding M&A efforts. The Company could manage a low level of corporate overheads while the production kept on ramping-up.


Underlying NPAT and Resource & Reserve Growth (Source – Company Reports)

For the year ending as at 30 June 2014, the Company reported record sales revenue of A$296M from 215,419oz produced at AISC A$1,094/oz. The underlying Net Profit was A$38.6M. Further, cash flow from operating activities was A$98.7M generating Company free cash flow of A$48.7M. Total Resource inventory was about 6.2Moz, which is 182% up from 2.2Moz as at 30 June 2013.

Looking at the June quarter, NST reported a record production of 115,000oz at an AISC of A$1,032/oz excluding the Jundee’s 75,000oz.

More importantly, NST’s performance for FY14 is originating from the Paulsens, Plutonic, Kanowna Belle and Kundana gold mines. In said year, NST could sell a total of 210,055 ounces of gold at an average price of A$1,410. NST’s and Fortescue JV with regards to continuation of regional exploration in the Ashburton Basin and Wyloo Dome areas appears to be on track. Other efforts including the work at regional targets in the Kalgoorlie area have also continued as per the plan. Few examples include, RC drilling at the Ambition prospect and RC drilling at the Red Eye prospect.


NST Daily Chart (Source - Thomson Reuters)

As per NST’s FY15 guidance, the Company expects to have an upsurge in growth with FY15 forecast of 550koz to 600koz at an AISC of A$1,050-$1,100/oz. The Capital Expenditure is expected to be of the order of A$100M-A$110M, wherein the Company will be spending 95% on supporting the capital and ~A$5M for Pegasus deposit for production.


Mid-point of FY15 Production by Site (Source – Company Reports)
 
With regards to the Jundee mine, the Company confirmed an unfailing production of 6.1Moz to date. To specifically note, the mine’s last 5 years free cash flow generation was A$1.3B. There is 68% increase in resources to 851,000oz at 6.8gpt, signifying at least 4 years of mine-life. NST’s FY2015 guidance is about 190,000-205,000oz at AISC of A$1,000-1,050/oz for this mine. It is further noted that a far-reaching “unclassified” mineralization exists throughout the Jundee mine.

Mainly, the high grade drilling results were up to 3,040gpt. The high grade intercepts have helped the Company to embark on an extended life of Jundee’s mine plan. Further, intercept of 1.1m @ 869gpt on the Northern side of the Moore Fault (earlier thought to be barren) is also showing mineralization in the Wilson Gap Area. As per NST, the Jundee results include (downhole and un-cut) - 0.4m @ 1,760gpt gold; 0.3m at 1,280gpt gold; 0.3m @ 1,080gpt gold; 0.8m @ 433gpt gold; 0.4m @ 418gpt gold; 0.5m @ 335gpt gold; and 6.1m @ 69gpt gold.

The Company also plans for deeper drilling in the near future at the Westside lode. To further note are the results of drilling at the Westside lode outside of the current mine plan which entail intercepts including - 0.5m @ 611gpt gold; 0.3m @ 302gpt gold; and 0.4m @ 169gpt gold. Also, the Company’s recent re-interpretation and evaluation of the East-West orientated Midas and Moneyline lodes reflects potential for further growth in Resources and mineral inventories.


Jundee Deep Drilling Cross Section (Source – Company Reports)

Plutonic mine which is located in the Upper Murchison region of WA, is reported to have a steady production with 5.3Moz. Company’s FY2015 guidance for this mine is for 100,000-110,000oz at AISC of A$1,250- A$1,300/oz. Also, resources of 1.45Moz are suggestive of supporting 5-7 year mine-life. The mine has the deepest part of 700m with the centroid of mining 400- 500 metres below surface. The key aspect that NST is focusing now is to reduce costs for better productivity from this mine.

The Kanowna Belle mine, which is located 18km north-east of Kalgoorlie in WA has a total production of 4.8Moz (till Dec 2013). NST’s FY2015 guidance is 80,000-85,000ozpa at AISC of A$1,100-A$1,150/oz for this mine. We see a great infrastructure with surplus capacity, as per the Company’s indications.

The Kundana mine, which is located 20km west of Kalgoorlie has a total production of 2.5Moz (till Dec 2013) with FY2015 guidance of 100,000-110,000oz at AISC of A$800 - A$850/oz. This mine includes three producing deposits - Raleigh, Rubicon and Hornet. NST’s discovery of Pegasus in the Kundana mine is a cornerstone for NST’s further growth potential. Pegasus has a resource of 763koz @ 11.4gpt. Further, drilling has intersected visible gold at 750mbs and over 150m deeper than the current resource. This is indicative of a significant potential for further resource increase.


Pegasus Resource (Source – Company Reports)

Another gem in the crown for NST’s growth appears to be the Paulsens mine located in the Ashburton region of WA. The total production has been realized to be of 700Koz to date. The FY2015 guidance has been set to be as 80,000-90,000oz at AISC of A$1,100-$1,150/oz. The resources of +400,000oz are supportive of 5 year mine life.

The other gems for NST have been the high-grade Titan discovery in 2013 and the New Galileo structure discovered 2014.

NST is focused on generating extensive operating free cashflow, and is known to provide steady and consistent dividends. Its efforts to extend mine life for all of its projects appear to be commendable. The strong balance sheet driven through an efficient management team will assist the Company to increase productivity. It very well appears that NST will give returns as per the current expectations.


Mine Life Extension (Source – Company Reports)

A strong pipeline, impressive results from drilling and hardheaded approach in resource allocation appear to add to NST’s crest for yielding fruitful results. The Company, however, needs to be sound in acting in view of few risks such as operating risk with regards to the increase in any operating costs, commodity price and exchange rate risk, geological risk associated with ore deposit’s characteristics’, etc.  


Emerging pipeline – 84 targets in 2014-2015 (Source – Company Reports)

Accordingly, we put a BUY recommendation for this stock at the current price of  $1.375  in view of expectations of higher returns in the near future and NST’s growing capability to overcome internal and external hurdles.

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