Northern Star Resources: Expands portfolio with De Grey Mining acquisition

Northern Star Resources Ltd (NST) announced that it has agreed to acquire 100% stake of De Grey Mining, through a share swap. Upon the completion of the transaction, NST will own DEG’s flagship project “Hemi”, a low-cost, long-life and large-scale gold development project in Western Australia. The Hemi Project is one of the largest undeveloped gold projects located in a Tier-1 mining jurisdiction, with an estimated annual gold production of 530kozpa over the first 10 years. Jarden research expects this acquisition to be 20% dilutive, as it will transfer material development, capital escalation, and permitting risks to Northern Star Resources' shareholders. The stock was down over 5% on December 2, 2024.

Founded in 2003, NST is a global-scale gold producer, with operating mines and exploration programs in Western Australia, Northern Territory (exploration only) and Alaska. NST was listed on the Australian Securities Exchange in 2003 and has expanded organically and through M&A transactions, including Paulsens Gold Mine (2010) acquisition and Super Pit Gold Mine (2020), a JV with Saracen Metal Holdings. NST currently has two production centers in South Australia, Kalgoorlie (52% of total gold sold in 1QFY25 (ended September 2024)), Yandal (33%) and one production center in Alaska, Pogo (15%).

‘Hemi’ acquisition and KCGM Mill expansion

With the acquisition of DEG, NST will add “Hemi” to its production center portfolio increasing the total number to four, with proforma mineral resources of 74.9Moz and ore reserves of 26.9Moz (Hemi: mineral resources of 11.2Moz and ore reserves of 6.0Moz). NST expects the construction to commence by mid-2024 and production by mid-2026. Hemi’s annual production is estimated to be around 553koz in the first 5 years, leading to a total production of 5.7Moz over 12 years. In addition to Hemi being in a Tier-1 location, NST expects significant exploration potential at Hemi across 150km-long tenure in an emerging gold district.

Additionally, in June 2023, NST announced a positive final investment decision for the KCGM mill expansion project located in Kalgoorlie, Western Australia. In FY25 (ended June 2024), the KCGM mill expansion will include delivery and installation of major equipment, as well as the commissioning of service infrastructure. KCGM is expected to operate at a capacity of 650,000oz per annum (pa) by FY26, with an increase to approximately 900,000 ozpa from FY29, reaching a steady state. This increase will follow a two-year ramp-up period during FY27-28, upon the completion of the mill expansion.

Robust financial performance, healthy shareholder returns

Over a longer time frame, NST has registered a steady increase in revenues over the last five years, delivering a CAGR of over 28% to A$4.92bn, in FY24. EBITDA grew at a CAGR of 34% and EPS surged from A$0.35 in FY20 to A$0.51 in FY24. Additionally, FCF increased to A$559mn from A$119mn, significantly improving the debt-to-equity to 15% from 37% in the same period. The company’s peers, Westgold Resources (WGX) and Ramelius Resources (RMS), also demonstrated revenue and EBITDA growth over the last five years, albeit at a lower rate. WGX revenues and EBITDA grew at a CAGR of 11% and 16% to A$716mn and A$265mn, respectively, whereas RMS registered a CAGR of 20% and 31%, reflecting sales of A$883mn and EBITDA at A$439mn, respectively, in FY24. On the margin front, WGX demonstrated a larger expansion in EBITDA margins, which increased by 570 bps to reach 37.0% in FY24, compared to an increase of 530 bps for NST to 42.9%, while RMS margins declined by 365bps to 49.8%.

In recent quarter 1QFY25, NST sales increased by 29.5% year-over-year (YoY) to A$1.4bn, driven by 21% YoY growth in average selling price and 6.6% YoY growth in sales volume. Additionally, the company reported an underlying FCF of A$52mn, up 86% YoY. Supported by the strong financials, the company announced an extension of its A$300mn share buy-back program for a further 12 months until September 2025, as of 1QFY25, 57% of this program is completed. NST paid full year dividend of A$0.50 per share, implying a payout ratio of 80% and a dividend yield of around 3%.

NST reiterates FY25 guidance of 1,650-1,800koz sales volume at ASIC of A$1,850-2,100/oz. Growth capex guided in the range of A$950-1,020mn, while the sustaining capex is expected to be A$200-250/oz. Additionally, NST guided KCGM Mill expansion capex of A$500-530mn.

An attractive valuation with protentional upside

NST valuation looks attractive as compared to its historical averages, despite over 17% YTD run-up in prices. The stock is currently trading at a P/E of 16x based on 2025 estimated earnings of A$0.1034 per share, compared to its 10-year average of 26x, and the global peers average of 20x. However, it looks expensive when compared to its local peer such as WGX and RMS, which are trading at 7x and 8x, respectively. Furthermore, it is trading at an EV/EBITDA of 6x based on 2025 estimated EBITDA of A$3.2bn, compared to its 10-year average of 8x and its global peer average of 10x. The EV/EBITDA also looks expensive when compared to WGX at 3x and RMS at 3x. Most of the 17 analysts covering the stock have significantly upgraded FY25 & FY26 revenues and earnings over the last few quarters. Most of the analyst have a ‘Buy’ recommendation, with an average target price of A$18.11, suggesting an upside potential of approximately 13% from the current market price.

Overall, NST is a global-scale gold producer with operations mainly in Western Australia and looking to expand through the latest acquisition of a low-cost, long-life and large-scale gold development project. Post the KCGM Mill Expansion and the development of Hemi, NST is expected to be positioned in the first half of the global cost curve. NST also have very strong financials which have allowed them to pay health shareholder returns consistently. However, investment risks include delay in regulatory approvals, delay in the development of Hemi project, underestimation of development cost and fluctuation in gold prices.