Northern Star sells in excess of 150,000 ounces of gold, resulting in FY 2015 sales of 580,000 ounces.
The weak Australian Dollar is benefiting the bottom line, as the net operating margin is in excess of US$350/oz, better than its competitors.
Now the company is debt-free, I expect a strong increase in the company's dividend.
Introduction
Since my original article in October of last year, Northern Star Resources' (OTCPK:NESRF) share price has more than doubled and is currently trading at in excess of 2 Australian Dollar. In this article I will provide some more background information about the company's Q2 production results and how this influences my opinion.
Northern Star Resources is an Australian company and I'd strongly recommend to trade in its shares through the facilities of the Australian Stock Exchange, where the company is listed with NST as its ticker symbol. The average daily dollar volume is in excess of US$6M. Northern Star's Q2 Production numbers
A record. That's the best way to describe Northern Star's production performance in the second quarter of calendar year 2015 (which is the fourth quarter of Northern Star's financial year). Its mines sold a total of in excess of152,000 ounces of gold during the quarter, which brings the total for FY 2015 at 580,785 ounces, right in the middle of the official production guidance which called for an output of 550,000-600,000 ounces of gold. (click to enlarge)
Source: company presentation
Producing a lot of gold is fun, but producing a lot of gold at a profit is even more fun! Northern Star disclosed it now expects to have an all-in sustaining cost of A$1050-1100/oz, and it actually expects it will be able to meet the lower part of that guidance. (click to enlarge)
Source: stockcharts.com
And this is where the weak Australian Dollar comes into play. As you can see on the previous image, the Australian Dollar continued to lose ground versus the American Dollar and even though the gold price in USD collapsed, it wasn't impacted as much in Australian Dollar as the weaker currency acted as compensation for a lower USD-gold price. Using Northern Star's guidance of A$1050/oz and applying the current USD/AUD exchange rate of 1.355, Northern Star's all-in sustaining cost per ounce is approximately US$775/oz, resulting in an operating margin of in excess of $350/oz, even after the gold price went south. What does this mean for the company as a whole?
At the current USD/AUD exchange rate, and assuming a gold production of 550,000 ounces in FY 2016 at an AISC of A$1050/oz, Northern Star is currently trading at roughly 5 times its expected net operating cash flow.
And granted, that's not ridiculously low for a company with a limited mine life, but you shouldn't forget Northern Star is putting its cash at work. It has paid down all its debt and on top of that, it has spent almost US$40M on exploration this year, to make sure its mines will remain open for longer than originally anticipated. Spending this much money on exploration isn't something a lot of companies can afford to do, and fortunately Northern Star's efforts are paying off, as it has discovered several hundred thousand new ounces on its properties. (click to enlarge)
Source: company presentation
Now all debt has been paid down and as I'm not expecting any more (substantial) acquisitions, I think Northern Star will start to distribute more of its cash flow amongst its shareholders. I'm hoping to see an increased dividend in FY 2016, and let me tell you, I would not be surprised if Northern Star would double its dividend (as the marginal additional cost of doubling the dividend would be just 10% of its net cash flow). Investment thesis
I still like Northern Star Resources and even though its share price has doubled compared to the price level when I wrote the first article, I think this company is poised to achieve great things. Its only worry is that it will have to replenish its resources to make sure its mines continue to perform like they are performing today, and as Northern Star has earmarked an annual budget of A$50M for exploration, I think the company will indeed be able to increase its resources.
Northern Star belongs on your watch list and if the share price dips next week on the sentiment of a lower gold price in USD, I think it might be a good idea to initiate a position!
NST Price at posting:
$2.03 Sentiment: Buy Disclosure: Held
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