Gold & Dividends Shine For Northern Star

This story features NORTHERN STAR RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: NST

New broker research on Northern Star Resources highlights production growth from current investment along with a rising dividend profile.

-Northern Star is now the largest solely ASX-listed gold miner
-Analysts positive on growth from the KCGM expansion, plus rising dividends
-Strong balance sheet lends sector-leading M&A capability
-Potential for special dividends, suggests Canaccord Genuity

By Mark Woodruff

Both Bell Potter and Morgans have over the last week initiated research coverage on gold miner Northern Star Resources ((NST)) with Buy (or equivalent) ratings at an average 12-month target price of $17.20.

A higher-than-expected FY24 dividend has generally boosted confidence the company can both fund an exciting growth profile and keep growing dividend payments for loyal shareholders.

Following the removal of Newcrest Mining from the ASX, Northern Star is the largest solely ASX-listed gold mining company and compares well to similar international peers, highlights Bell Potter.

Providing upside potential, the current $1.5bn KCGM mill expansion is targeting over 900koz of production per year.

Apart from the benefit of an ongoing strong gold price, Morgans anticipates KCGM will become a globally significant asset once its expansion has been completed.

Mining exclusively in advanced first world economies, the company operates and wholly owns the KCGM, Kalgoorlie and Yandal operations, as well as Pogo in Alaska.

This broker forecasts production in Western Australia and North America will grow to 2m ounces from around 1.6moz by FY26 before increasing to between 2-2.2moz per year following the KCGM expansion.

Gold is produced from three productions centres, with six different operations, thereby lowering the negative impact of any production asset disruptions and diversifying asset risk, highlights Bell Potter.

The main KCGM operations (Kalgoorlie Production Centre) located adjacent to Kalgoorlie in Western Australia accounts for 65% of the broker’s $17.50 valuation/target price.

Transitioning from a leading mid-tier producer, Northern Star has registered cumulative two-year growth in earnings, profit and dividend payout of 40%, 225% and 53%, respectively, highlights Morgans.

Certainly, the share price has been strong over that period, doubling from lows of around $7.00, but is still around -7.50% shy of the average target price of seven covering brokers in the FNArena database.

Due to an attractive cost base, operating margins are well leveraged to the rising price of gold, suggests Morgans. Inflationary pressures may have peaked but remain sticky, spurring demand for the inflation hedge, while Central bank purchasing has added to demand.

On top of these factors, the analysts note potential for escalating geopolitical tensions is playing to gold’s safe haven status, while upcoming US rate cuts may be a tailwind for the gold price as the US dollar could weaken and funds flow out of bonds into alternative asset classes.

Production remains modestly hedged, suggests Morgans, with 1.8moz at an average price of $3,122/oz.

Growing production and forecast earnings, as well as a low debt position combine to create a sector-leading M&A capability for assets that fit management’s target criteria, explains Bell Potter.

Importantly, the company’s producing assets are supported by a large ore reserve of 431mt at 1.5g/t of gold containing 20.9m oz of gold. It’s noted the mineral resource base of 1bnt at 1.8g/t of gold containing 61.3moz of gold is also very large.

Capital management

Supporting shareholder returns, management targets dividends of between 20-30% of cash-earnings along with the current $300m share buyback program. Given a strong balance sheet, Canaccord Genuity sees scope for not only M&A activity but also special dividends.

Due to the Saracen Minerals takeover, the company doesn’t expect to pay tax until sometime in FY26, so dividends will likely be unfranked for at least the next 18 months, Bell Potter suggests.

Northern Star closed FY24 with $358m net cash.

A final dividend of 25 cents was declared following in-line results and unchanged FY25 production guidance, and the total FY24 dividend of 40 cents beat the consensus expectation by 14%.

FY24 cash tax was materially lower-than-expected by Macquarie, providing a boost to ‘cash earnings’ (driver of the dividend policy) and is the primary reason behind this broker’s 10% lift to its FY25 dividend expectations.

The image below relates to Northern Star’s Pogo operations in Alaska.

KCGM explained

Macquarie noted from commentary at FY24 results the KCGM mill expansion was tracking to plan.

Processing capacity is currently being expanded to 27mtpa from 13mtpa with completion expected in early FY27, and ramp-up to nameplate production in FY29. This deposit has ore reserves of 13.2moz and mineral resources of 31.6moz.

Bell Potter forecasts increasing free cash flows (FCF) in FY26 and FY27 as the expansion completes and average grades trend back towards ore reserve averages.

Management’s expansion capex guidance across FY25-27 is for -$515m, -$540m and -$100m respectively.

In addition to the KCGM processing expansion, around -$575m of other growth capital (largely mining related) is guided for FY25 at KCGM.

The (relative) doubters

Following the release of FY24 results on August 22, Ord Minnett (Hold) acknowledged Northern Star’s growth appeal and the need by investors to own larger, liquid gold equities in the current positive environment for gold.

Valuation remains the sticking point for this broker, as well as subdued FCF during a strong period of re-investment for the company.

After raising depreciation and amortisation expense assumptions to align with management’s guidance, Ord Minnett’s target rose by 3% to $13.90.

Morgan Stanley retained its $14.35 target and Equal-weight rating, expressing a preference for Evolution Mining ((EVN)) based on a lower hedging profile.

While Jarden recently noted a great portfolio of high-quality assets with embedded growth, valuation metrics are considered unsupportive and the current elevated capex cycle limits material FCF generation until FY28.

Similarly, Goldman Sachs has valuation concerns, but still has a liking for the company’s outlook on expanded KCGM operations and other asset growth.

The Outlook

Following FY24 results, UBS continued to like exposure to gold and suggested Northern Star Resources was the logical way to gain exposure.

Canaccord Genuity feels the higher-than-anticipated dividend payment sends a strong message the business remains fundamentally undervalued.

Management is confident Northern Star can comfortably fund its organic growth pipeline, while maintaining a growing dividend profile.

The new targets by Buy-rated Morgans and Bell Potter of respectively $17.50 and $16.90 have boosted the average target of seven covering brokers in the FNArena database to $15.94 from $15.43.

There are now five brokers with Buy or equivalent ratings and two Holds.

Outside of daily coverage, Canaccord Genuity, Goldman Sachs and Jarden have respective ratings of Buy, Neutral and Underweight with an average target of $14.91.

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