Exactly 10 years ago, if you were savvy (or lucky) enough to have picked up 80,000 shares in Australian gold production and exploration company Northern Star Resources Ltd (ASX: NST) at a price of $0.125, you’d be pretty pleased with yourself.
The company had no revenue between 2006-07 and 2009-10, but during the six years to 2015-16 revenue boomed from $115 million to almost $800 million.
With earnings-per-share (EPS) enjoying a similarly meteoric rise, the share price over this 10-year period has risen to $3.44 (as of Friday’s close) and a $10,000 investment, inclusive of dividends received, would be worth almost 30 times your outlay.
The gold price in Australian dollars is expected to continue to rise which is why the company’s earnings for the 2016-17 and 2017-18 financial years are also expected to increase by 37.5% and 44.7% respectively.
If this sort of business success flows through to the company’s share price, then existing shareholders are going to continue being content with their investment no doubt.
However, if you’re one of those investors who likes to buy and hold for periods as long as a decade (or more), the only thing you’re going to need to consider is whether the gold price chart below (in Australian dollars) is going to have a similar trajectory over the next 10 years.
Gold Price In Australia Per Ounce Charts
And that’s a big unknown.
Whilst some credence can perhaps be given to Australian dollar gold price forecasts for the next year (maybe), I’d say it’s next to impossible to know where gold will be trading between two and 10 years from now.
So, anyone wanting to hold Northern Star Resources for the next 10 years and hoping to earn the same compound annual growth rate of 40.6% at today’s price, is perhaps being unrealistic.
Regardless of the fact that the company has enjoyed rising revenues, rising operating margins, and a healthy rise in EPS over the last six or so years, it doesn’t change the fact that this company, and others of a similar ilk such as St Barbara Ltd (ASX: SBM), Sandfire Resources NL (ASX: SFR) and Newcrest Mining Limited (ASX: NCM) are completely dependent on the gold price.
A commodity price they have no control over.
So, in a sense, a windfall gain in Northern Star Resources due to a rising Australian dollar gold price over the last 10 years is just that, a windfall and it might be prudent to reduce a position in a company like this to less than 2% of a portfolio.
There’s nothing wrong with an exposure to companies such as Northern Star Resources, but you need to consider the risk of continuing to hold shares like these after such good share price performance.
If you can reduce your weighting to around 2%, you could then use freed-up cash in companies such as REA Group Limited (ASX: REA), SEEK Limited (ASX: SEK) or a2 Milk Company Ltd (Australia) (ASX: A2M).
Whatever stocks you choose, be aware of the risks you’re taking by holding outsized positions.
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Returns as of 6th October 2020
Motley Fool contributor Edward Vesely owns shares of Bellamy's Australia and Sirtex Medical Limited. The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.