The Northern Star Resources Ltd (ASX: NST) share price has started the week strongly.
The gold miner rose 6.5% to $23.55 on Monday following news of a rejected takeover approach from Gold Fields.
But putting that excitement to one side, does the Northern Star share price look cheap based on what the business could earn over the next few years?
I think it does.
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The valuation gets cheaper
On FY27 numbers alone, I would describe Northern Star as reasonably priced rather than obviously cheap.
Consensus forecasts point to earnings per share (EPS) of $1.35 in FY27. At $24.02, that puts the shares on a forward PE ratio of around 18 times.
That is not demanding, but it is what comes next that really catches my attention.
Northern Star's EPS is expected to jump to $2.41 in FY28 and then $3.30 in FY29.
If those forecasts prove accurate, today's share price represents less than 10 times FY28 earnings and only around 7 times FY29 earnings.
For a major gold producer, I think those multiples look cheap.
The dividend outlook also improves alongside earnings. Consensus estimates point to dividends per share of 51.6 cents in FY27, 73 cents in FY28, and 86.2 cents in FY29.
At the current Northern Star share price, that would see the dividend yield rise from a little over 2% in FY27 to around 3.6% by FY29.
Gold will decide how cheap Northern Star really is
There is an obvious catch.
Gold miners do not control the price of what they sell, so those earnings forecasts will depend heavily on where gold trades over the next few years.
Right now, gold is around US$4,268 an ounce.
A note out of Bell Potter shows that it is forecasting US$4,875 an ounce in 2027 and US$4,900 in 2028, before easing to US$4,607 in 2029.
If gold remains around those elevated levels, it is easier to see how Northern Star could generate the sharp earnings growth analysts currently expect.
But the reverse is also true.
A material fall in the gold price, potentially driven by higher interest rates or changing investor demand, could pull earnings estimates lower and make today's apparently cheap forward multiples much less meaningful.
That is why I would not look at the 7 times FY29 PE ratio in isolation. It is attractive, but there is more uncertainty attached to it than there would be for a business with greater control over its selling prices.
Foolish takeaway
For investors looking for gold exposure, I think the Northern Star share price looks like a cheap buy at around $23.
There is plenty riding on the gold price, so I would expect the investment case to move with it. But with Northern Star potentially earning more than $3 per share by FY29, I think the current price justifies taking that commodity risk.
