De Grey Offsets Northern Star’s Production Doubt

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

Northern Star Resources’ 2moz gold production target by FY26 is under scrutiny following an FY25 guidance downgrade, although the De Grey acquisition is lauded.

-Northern Star Resources downgrades FY25 production guidance
-Delays at KCGM in the March quarter to blame
-FY26 production target now uncertain
-Acquisition of De Grey Mining a positive

By Greg Peel

Northern Star Resources ((NST)) produced 388koz of gold in the March quarter, -6% below consensus forecasts, with sales of 385koz, -7% below. All-in costs of $2,246/oz proved 9% above consensus.

Northern Star’s Pogo mine once again performed well, but lower productivity was cited at the flagship Kalgoorlie Consolidated Gold Mines (KCGM), leading to delayed access to the high-grade Golden Pike mining area. Yandal production was solid, but operating costs and growth capex have increased due to higher than anticipated maintenance costs and royalties (higher gold price).

FY25 production guidance has subsequently been revised down to $1,630-1,660koz, from a prior 1,650-1,680koz, and all-in costs have been revised up to $2,100-2,200/oz from $1850-2,100/oz.

Citi notes it is the fourth year in a row Northern Star has missed on prior cost guidance.

The miner is nearing the end of its prior five-year plan, which targeted 2moz of production by FY26. While management has not revised this target, it admits achieving it is now a matter of “not if, but when”.

Downside Risk to KCGM

Focus remains on KCGM and its ramp-up, UBS suggests, as the operation remains a key value driver for Northern Star because this is where the growth is coming from. Previous production guidance was for 650koz in FY26 and 900kozpa from FY29 compared to the current run-rate of around 400kozpa.

Through FY25, and as the KCGM plant expansion continues to track on time and budget, UBS has walked back the FY26 target to now sit at 612koz assuming only delayed access to grade. Reportedly, the hardest issue has been lifting mining rates back up to the more than 20mt per quarter rate, allowing more access to the high-grade Gold Pike North ore.

Good news is the increase to FY25 growth capex guidance is a result of some developments tracking ahead of plan, while higher exploration spend represents accelerated activity following early successful results. A reserve/resource update is expected this month.

Forecast Downgrades

Brokers had already been moderately sceptical of Northern Star reaching its 2moz production target by FY26, with consensus sitting at 1.91moz prior to the March quarter result. Further downgrades have now followed.

Goldman Sachs is forecasting 1.86moz in FY26, rising to 2moz by mid-2027. New FY26 production guidance is expected from the company in July, post the June quarter result, while a new updated three-year outlook is expected in the second half of this year.

Macquarie is forecasting 1.88moz for FY26 and Jarden 1.85moz. Bell Potter has 1.80moz, forecasting 2moz to be reached in FY27.

Despite management’s FY25 production downgrade, Morgans remains positive given the Golden Pike delay is a non-systemic issue only affecting the near-term. Also; gold price movements may potentially make up lost ground on revenue relative to production ounces, plus there is the successful acquisition of De Grey Mining ((DEG)).

De Grey Mining

De Grey Mining has been developing the large scale, high value, near-surface Hemi gold project in the Pilbara. Northern Star’s proposed all-scrip acquisition of De Grey has received Federal Court approval, with the implementation date set for May 5th (today).

Goldman Sachs continues to believe De Grey’s Hemi project will enhance the quality and scale of Northern Star’s portfolio, improving pro-forma production, costs and medium-term earnings (ahead of peers) via the addition of a high quality greenfield project, with minimal impact to the capital management framework.

Morgans has adopted the Hemi definitive feasibility (DFS) as its base case, with modest open pit mine life extensions of approximately three years and capex assumptions of -$2bn. The transaction is value accretive, on Morgans’ calculations, uplifting group production by approximately 22% and reducing group costs by approximately -9% following first gold in FY29, while increasing earnings per share by 44%.

The weak March quarter result has overshadowed UBS’ first attempt to incorporate Hemi into modelling, with operational focus on the strong quarter-on-quarter improvement required to meet downgraded FY25 production guidance, and how much it reduces previous FY26 guidance of 2moz, before the analysts can really think about integrating and optimising Hemi into the portfolio and the linked asset recycling program.

Nonetheless, UBS sees the Hemi acquisition as net present value, cost, quality and earnings accretive on production.

Valuation

Northern Star’s on-market share buyback program is 89% complete (average price $10.51) and remains open to September, and the company’s ongoing dividend policy remains supported by the 20-30% cash earnings policy.

Northern Star Resources offers a compelling investment case, Morgans believes, as the premier Australian-focused gold producer. Capital upside is supported by the 2moz growth profile by FY26 (which Morgans believes may be still attainable), record gold prices and an active capital management policy (dividends and buybacks). The addition of De Grey’s Hemi project secures additional longevity beyond the current growth profile.

Morgans retains its Add rating, lifting its target to $25.32 from $21.57 despite the guidance downgrade. Morgans’ target increase is otherwise a result of the broker lifting its gold price forecasts following consistent appreciation in the spot price.

The softer production outlook sees Macquarie’s target price trimmed -4% to $26.00, with valuation methodology unchanged at 1.3x net asset value and 10x operating cash flow. Macquarie retains Outperform.

UBS’ net present value-based target is unchanged at $25.80 and a Buy rating is maintained.

Bell Potter has decreased its target to $20.85 from $22.15 on forecast changes and downgraded its recommendation to Hold from Buy on valuation grounds. The target is set with respect to the broker’s long-term gold price forecast of A$3,800/oz (noting the spot gold price at the time of reporting was A$5,160/oz).

Bell Potter’s recommendation would revert to Buy applying a long-term gold price of A$4,300/oz. Northern Star remains an attractive investment, the broker believes, given (1) forecast production growth to 2mozpa in FY27, (2) expansions being strongly supported by record gold prices, and (3) the portfolio-enhancing effect of the long-life and low operating cost Hemi development project.

Citi still believes the Northern Star share price can trade higher as the rising gold price results in an ongoing earnings per share upgrade cycle, but for now retains Neutral with an unchanged $20.00 target.

Ord Minnett last updated on Northern Star in mid-April and has a Hold rating with a $19.40 target. Morgan Stanley is also yet to update on the March quarter result, having upgraded to Overweight from Equal-weight in early April with a target of $20.50.

There are currently four Buy or equivalent ratings and three Holds among the seven brokers monitored daily by FNArena covering Northern Star. The consensus target is 22.55, ranging from 25.80 (UBS) to 19.40 (Ord Minnett).

Goldman Sachs has retained its Buy rating and $22.10 target, while Jarden sticks with Neutral, increasing its target to $18.30 from $18.10.

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