The Northern Star Resources Ltd (ASX: NST) share price has had a great run so far in 2019, lifting from just over $9 per share to $11.18 per share this morning (at the time of writing), a gain of more than 20%.
The two big drivers have been the jumping price of gold and falling Aussie dollar, but before you rush to buy shares there are 3 important things you must know:
1. How much gold does Northern Star Resources have?
At 30 June 2019, Northern Star estimated that it had total group reserves of 5.4 million ounces of gold.
This might sound like a lot, but there is an enormous divide between Northern Star, Australia’s second largest gold producer, and Newcrest Mining Limited (ASX: NCM), the largest listed producer, which had a reported 54 million ounces of gold at 31 December 2018.
Based on the 0.8 million ounces of gold Northern Star produced in the 2019 financial year, the company has an approximate reserve life of 6.75 years.
2. How much debt does Northern Star Resources have?
Great question! Debt can amplify returns for shareholders when gold prices are climbing, but the leverage can quickly turn ugly if commodity prices fall and the company needs to raise equity to pay back debt.
Newcrest knows this only too well after piling on debt leading up to the gold price collapse in 2013 and 2014.
Fortunately, Northern Star is well positioned with just $25 million of borrowings and $266 million in cash at 30 June 2019.
3. What are Northern Star’s production costs?
One of the few competitive advantages a gold producer can hold is minimising its costs.
For the year to 30 June 2019, Northern Star Resources reported an all-in sustaining cost (AISC) per ounce of $1,296 per ounce.
This compares to just US$738 per ounce (around $1,091) for Newcrest Mining, which benefits from its significant economies of scale as well as high copper production which, as a by-product of gold production, is treated as a credit towards the all-in sustaining cost calculation, helping to lower it.
The answers to these 3 questions help to give a basic sense of a Northern Star’s potential value drivers. Although Northern Star is in a great position financially and could have a bright future, I remain cautious of volatile commodity prices and would be careful to limit my exposure to gold miners if I was to invest.
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