Gold producer Northern Star Resources Ltd (ASX: NST) today announced it is likely to report a potentially significant resources increase at its Paulsen's mine in Western Australia.
Northern Star, the ASX's second-largest miner by production, has proven to be an extremely rewarding investment over the past five years, with dividends and capital gains combining for an average annual total shareholder return of 130%, according to Morningstar.
By anyone's standards, that's impressive.
Part of the secret behind Northern Star's success is its management, who hold around 5% of the available shares. By maintaining flexible balance sheets and making opportunistic acquisitions, they've unearthed significant value for shareholders.
In a recent AGM presentation, the company highlighted it had grown from one mine and production of 100,000 ounces per annum (ozpa), to five mines and 550-600,000ozpa of production within a year. The company is clearly in a state of transformation. And analysts agree.
With the gold price sitting around $1,500/oz (with some hedging in place) and a forecast all-in sustaining cost (AISC) of between $1,050/oz and $1,100/oz, significant earnings growth is expected in the year ahead.
According to Morningstar, earnings per share are expected to jump from 8 cents to nearly 25 cents. If all goes according to plan, that'd put the stock on a P/E ratio of just 7.2, even after the recent 45% rally in share price. Northern Star's corporate costs are extremely low and thanks to its high grade mines, its cost base is likely to stay low.
However given its growth profile, the company's valuation is highly dependent on its resources base. A recent broker survey showed that for every extra year of mine life added, between 24 cents per share and 38 cents per share is added to its valuation. At a current market price of $1.80, a 30 cent increase in valuation is promising.
That's why today's results mean a lot to investors and can explain why its share price has jumped 5%. Today's news of a chance the company will significantly increase its resources base at Paulsens, comes as part of an aggressive $50 million drilling campaign and follows a significant discovery at the company's Kanowna Belle Gold Mine in December.
Foolish takeaway
Historically, Northern Star's business model has proven very effective and it could well continue to do so long into the future. However, as with all resources companies, its earnings are at the mercy of the market, so downside risks are also on the table.
Saying that however, if I were to choose a gold miner, Northern Star or its larger listed peer Newcrest Mining Ltd (ASX: NCM) would be at the top of my list.
