https://www.afr.com/companies/mining/northern-star-s-stuart-tonkin-seeks-to-build-a-new-gold-dream-20220509-p5ajv1
Article in the AFR by their WA reporter Michael Bennet on May 15 - text included below for those outside the AFR paywall
A little over 18 months ago, the acquisitive Northern Star Resources unveiled its biggest deal yet – a $16 billion tie-up with fellow Perth gold miner Saracen Mineral Holdings.
At the time in early October 2020, Northern Star’s shares jumped to $14.84 as investors cheered the plan to bring the iconic Kalgoorlie Super Pit under one owner, unlock $1.5-$2 billion of pre-tax synergies and – eventually – produce 2 million ounces of gold a year.
It peaked at almost $17 a month later, at a time when gold was going for about $US1900 an ounce. But on Friday, while gold was trading around $US1822, Northern Star shares changed hands for $8.55 – around 42 per cent lower than when it unveiled the Saracen “merger of equals”, compared to an 18 per cent gain in the broader S&P/ASX 200.
Other gold miners have also sold off as the economic and interest rate outlooks shifted, with the only bigger gold miner on the bourse, Newcrest Mining, down around 19 per cent and the All Ordinaries gold sub industry index off 30 per cent.
But Northern Star – which has previously proved sceptics of its growth strategy wrong – continues to divide the market as managing director Stuart Tonkin seeks to execute on its acquisitions and oversee a new era beyond the renowned legacies left by former leader Bill Beament and Saracen’s Raleigh Finlayson.
Bears versus bulls
At Perth-based broker Argonaut, analyst John MacDonald reiterated his sell on the stock following its March quarterly late last month, even trimming his valuation to $7.60, citing its “relatively narrow margins”.
However, at the other end of the market, Canaccord’s Tim McCormack has a net asset valuation and price target about double that at $15.15, backing management to achieve its goal of being a 2 million ounces a year producer and telling clients it’s a buy.
Other brokers including Citi, Barrenjoey and Macquarie also rate Northern Star a buy, albeit with slightly lower targets of $13, and $14 for the latter.
Mr MacDonald’s relative bearishness partly stems from his doubts Northern Star will notably lower its overall costs, a dynamic that he says has weighed on the margins generated from production in the past few years.
“Northern Star is still striving for better performance on average across the group. On our figures a 25 per cent corporate level margin on 20 million ounces can justify the share price,” he says.
“Problem is, Northern Star has delivered a 10 per cent average margin on 3.5 million ounces depleted since mid-2020.”
Rising costs are a topical problem for the industry, with all miners recently suffering as inflation, COVID-19 disruptions and supply chain bottlenecks bite.
In its most recent quarterly, Northern Star upped its full-year “all-in sustaining costs” (AISC) guidance to $1600-1640 an ounce, up from $1475-1575, blaming higher costs at its Pogo operation in Alaska to “accelerate mine productivity” and “optimise its future cost profile”.
For a company that sold 380,075 ounces at an average realised price of $2468 an ounce in the quarter, general observers would say things still look pretty good.
The trouble is, Northern Star has a higher AISC than major peers Newcrest and Evolution Mining at a time when costs are in the spotlight. More broadly, AISC may not always give shareholders the clearest picture of the returns heading their way.
In fresh analysis questioning “who actually makes money?” in the industry at an Aussie dollar gold price of $2600 (the average price in the March quarter) Euroz Hartleys analyst Michael Scantlebury says a key issue is that the AISC metric misses some expenses.
He says one of the “largest culprits” is development capital expenditure being allocated as non-sustaining capital, which “becomes an issue when miners are required to continually (every year) develop new mines to sustain mine life”.
Instead, he says investors should buy gold miners with the lowest “corporate all-in costs” (CAIC), such as smaller players West African Resources and Perseus Mining, arguing the metric identifies the “truly lowest cost operators in the industry”.
Northern Star was ranked the seventh lowest CAIC producer, just ahead of Evolution.
“We stress that successful producers find the balance between sustaining profitable operations, investing in future growth and rewarding shareholders,” Mr Scantlebury says.
Homing in on costs
Growth has long been core at Northern Star. However, the company recently shunned an estimated $1 billion-plus acquisition of a stake in the Windfall gold project in Canada after failing to make the deal stack up.
The move saw the market home in on costs, and performance at Pogo and its WA operations, particularly “KCGM”, the trigger for the Saracen deal – to consolidate their stakes in Kalgoorlie’s “Golden Mile” under one owner for the first time in 125 years.
The market’s key focus is the release of KCGM’s mill expansion study in coming months to see if it will up throughput at the plant to around 22 million tonnes, which analysts expect to chew up more investment dollars, likely in the hundreds of millions.
Pogo, an underground mine that Northern Star paid $US260 million for in 2018, is also getting more love.
Barrenjoey’s Daniel Morgan says it’s showing improvement after the company guided to an annualised run-rate of 240,000 ounces in the second half following “heavier” investment in people and equipment.
Citi’s Kate McCutcheon adds: “Pogo gets a lot of air time, but we’d highlight that it’s only about 15 per cent of our group EBITDA.”
Speaking from Pogo, Northern Star’s Stuart Tonkin acknowledged the decline in its share price since the Saracen deal, saying it partly reflected the broader industry sell-off but also some “temporary operational pressures”.
However, he argued that its elevated all-in costs reflected the investments being made in future growth, and it actually has a “low-capital intensity” compared to peers.
M&A would remain part of Northern Star’s strategy to ultimately produce 1.8-2.2 million ounces a year with a decade-plus reserve life, he says. But Tonkin is keen to point out his focus is on “sustained value” for shareholders and that its organic growth options are looking good.
He adds that while “investor sentiment” expected value straight away from the Saracen deal, they did articulate that it would take time and investments in KCGM and its Yandal operations in WA to liberate synergies, drive production growth and lower costs.
“From what I see today, the business is in a much stronger position than the sum of the parts,” he tells The Australian Financial Review.
“The past two quarters have been impacted by the current labour and cost environment, but I am comfortable we have the team and the strategies in place to deliver our value-creating organic growth strategy, which will reflect again in the share price.
“Northern Star has a track record of being able to deliver production growth, reserve and resource growth, dividend growth and retained earnings growth without having to trade one for the other or focus on the short term over the long term.”
