Millionaire factory Northern Star poised for more growth

Here's a closer look at Northern Star Resources Ltd (ASX: NST) and why it will grow to be a 1 million tonne per year gold company.

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An investment of $10,000 in Northern Star Resources Ltd (ASX: NST) shares on 1 January 2010 would have been worth a whopping $4,156,662 by 1 January 2020, which is an amazing compound annual growth rate (CAGR) of 83%. Dreams are made of growth like this.

For the past decade Northern Star has grown to dominate the Kalgoorlie region and gained renown as a global leader in the gold industry. Northern Star proudly calls itself an owner of "tier 1 assets in tier 1 locations".

Since reporting strong first half earnings on 11 February, the Northern Star share price has risen by 1.2% after initially falling. This is emblematic of Northern Star's share price, which can be volatile but always trends upwards over the long-term.

Northern Star's first-half FY20 earnings

Northern Star smashed market expectations by around $30 million with a H1 underlying profit of $139 million. This is a 53% improvement on FY18 previous calendar period (pcp) and boosts earnings per share (EPS) by 51% against pcp.

Largely, this is due to an average gold sale price of $2,046 and increases in production contributions from Northern Star's Pogo mine in Alaska. Northern Star's second half FY20 guidance anticipates the miner pushing into the coveted 1 million tonnes per year gold production territory, with the addition of production from KCGM.

The Northern Star way

Northern Star paid more for its 50% stake in the KCGM super-pit mine than Saracen Mineral Holdings Limited (ASX: SAR), because it also purchased the right to operate. This is an important factor for investors. Northern Star has a track record of increasing production, reducing all in sustaining costs (AISC) and increasing mine life.

The company purchased Jundee in 2014. By 2018, its exploration methods had grown the mineral reserves (the economically mineable portion) by ~289%.

Every operations metric within Jundee also grew. Indicators like diamond drilling metres, underground tonnes mined and jumbo development metres all rose. At the Pogo mine, the company demonstrated the same approach with a 120% increase in production ounces in 2 months.

By December FY21, I fully expect KCGM to be displaying similar growth in production metrics and free cash flow contribution. I will also be watching very closely to see the potential for increases to mineral reserves and mine life. 

Foolish takeaway

Northern Star is a very well managed gold mining company. It is adept at wringing value from its acquisitions and is also a wily investor. It purchased Plutonic Gold Mine in 2013 during a cyclical bust and sold it into a boom in 2016.

Gold remains an antidote to chaos. It has seen record levels in recent months and is likely to stay at high levels for the foreseeable future. So with a company AISC of AUD$1,454, Northern Star looks set to weather any significant drops in the gold price and remain profitable. In my opinion, this means it is well poised to continue its path towards growth while selling at a high gold price.

Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Scott Phillips.

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