The Northern Star Resources Ltd (ASX: NST) share price has continued its phenomenal gains of 2019 so far and has just come off a new all-time high. NST shares opened trading this morning at $11.71 and have since jumped up to $11.94 at the time of writing (just shy of last week's new all-time high of $11.98). Northern Star shares are now up 29% for the year so far and 67% over the last 12 months.
So are these levels justified for Northern Star? Or has this share price gotten ahead of itself? Let's take a closer look.
What does Northern Star do?
Northern Star is a mid-cap ASX gold miner with a market capitalisation of $7.6 billion. The company has expanded from one gold mine in 2010 to three today – located in Australia, the United States (US) and Canada. A fourth mine in Alaska is also slated to come online in the near future. Northern Star currently produces more than 575,000 ounces of gold per year, and has a cost basis per ounce of gold mined of A$1,029. Considering the price of an ounce of gold has risen from $1,675 a year ago to today's levels of $2,010 (close to its record high in Australian dollars), we can see why NST shares have been shooting the lights out.
Shooting star, or falling star?
On production of 575,000 ounces, I estimate that Northern Star has annual cash flow of about $564 million, based on today's gold price and NST's stated cost-per-ounce. Further to this, Northern Star estimates that the company has roughly 4 million ounces of gold in reserve, with a further 15.9 million ounces in 'Resource' status (meaning that the company has reasonable confidence of mining availability). Seeing as the value of its reserves alone comes in at $8 billion (at today's prices), Northern Star may not be as expensive at it appears on paper. However, relying on this metric alone assumes that gold prices continue to hold at these levels.
Foolish takeaway
Valuing NST shares comes down to whether the gold price is sustainable at current levels. If NST can continue selling an ounce of gold for more than $2,000 over a sustained period, the company's shares will start to look cheap, even at today's prices. But this is of course purely speculative, and gold may well drop back down to levels we saw this time last year or lower. Not being much of a gambler myself, I will be sitting this one out at current prices.
