After acquiring the Paulsens gold mine in 2010 the rise of Northern Star Resources Ltd (ASX: NST) has been a shining light in the resources sector, delivering shareholders annual returns over 100% during this time. It now operates six gold mines across WA and has numerous development projects underway via an extensive exploration program.
Around 135,498oz of gold was sold during the latest quarter to March 31 2015 for an average price of A$1,500 at an all in sustaining cost (AISC) of A$1,172/oz. These results position the company to achieve its annual production target of 550,000-600,000 oz at an (AISC) of A$1,050-1,100/oz and cements its position as the second-largest ASX listed gold miner.
The success of Northern Star over the past five years can be largely attributed to the following key attributes.
Experienced Management
Managing Director Bill Beament and Chief Operating Officer Stuart Tonkin are mining engineers with substantial experience in the industry over the past twenty years. This experience, particularly in mining production, has resulted in highly efficient operations that are extracting more tonnes at a lower cost. Productivity gains of up to 40% have been achieved once Northern Star took control of the mining process.
Acquisition Excellence
During the past two years most resources companies have been cutting costs and slashing capital expenditure. Others, including Barrick Gold Corporation and Newmont Mining, have also divested high quality Australian assets. Northern Star, carrying low debt and enjoying strong cash flows during this time, capitalised on the downturn and acquired several of these assets including the Plutonic and Jundee gold mines.
Northern Star's prerequisites for an acquisition include strong production and cash flow from day one and the potential to extend mine life with minimal capital investment. The performance of acquisitions to date has been exceptional with all projects, except the Plutonic mining operation, achieving full payback of the purchase price within eight months of operations starting.
Management acquired the Hermes gold project in February 2015 which highlights its strategic thinking. This is a small resource aimed at providing additional feed to the Plutonic mill which is currently under-utilised.
The business has over $110 million of cash and bullion on hand, giving it the firepower needed to acquire additional assets that come to market if they meet its criteria.
History of Increasing Resources and Extending the Mine Life
Northern Star has a proven track record of economical exploration. Their aggressive $50 million exploration program currently underway plans to increase the resources, reserves and mine life at each of its operating projects significantly.
During the March quarter, the resources at the Jundee and Pegasus projects increased by 299koz and 350koz respectively. Resource and reserve upgrades occur on a regular basis for Northern Star and investors can expect more in the coming year as additional results from the exploration program are processed.
Risks
Acquisitions are a key risk and those made by the company have proven successful to date except Plutonic, which reported AISC's of $1,784/oz for the recent quarter against predicted AISC's of $1,050-1200/oz before the acquisition.
Management has stated that it is going through a "construct and rebuild" phase for a new future. Continual high costs at Plutonic would be particularly concerning considering several key management members have extensive operational experience at this mine. On the upside, a company-wide AISC reduction around 5% could be possible if Northern Star achieves the predicted cost levels at Plutonic.
In light of the performance of Plutonic, it may be appropriate for Northern Star management to ensure all acquisitions are fully integrated into the company before considering additional projects.
Northern Star is a pure gold play and is therefore fully exposed to the gold price and, to a lesser extent, the US/AUD exchange rate. Any significant decline in the gold price or appreciation of the Aussie dollar will erode profit margins.
Should you buy?
Northern Star has proven highly capable of acquiring quality mining assets and then adding significant shareholder value by improving mining operations and increasing the resources, reserves and mine life through successful exploration campaigns. With over $110 million of cash equivalents on hand and substantial free cash flow, the company has the financial flexibility to increase shareholder returns in the coming years via additional acquisitions or increasing dividends.
At the current price of $2.20, Northern Star provides investors with a fully franked 2.2% dividend, an undemanding forward price-earnings ratio of 9, compared to the sector average of 13.9 and substantial growth options in the future.
With the resources sector currently struggling through dark times, Northern Star is one of the few shining lights and could provide resources investors with a lower risk option for their portfolio.
Investing in the resources sector carries a higher risk than many other industries due to the cyclical nature of commodities. If you invest some of your money in higher reward, higher risk stocks, then the following small-cap stocks could be exactly what you are looking for:
