The March quarter went awry for Northern Star Resources ((NST)), as a change from contract mining to owner operations at the newly-acquired Pogo mine in Alaska meant a delay in getting equipment to site and training operators. As a result, costs spiralled upwards.
Pogo produced just 33,000 ounces in the March quarter and all-in sustaining costs (AISC) were $2062/oz, which meant that the asset was negative on cash flow in the quarter. This has forced Northern Star to increase FY19 cost guidance to $1225-1275/oz.
Australian assets delivered quarterly improvements, as expected, and the company is targeting 235-260,000 ounces at AISC of $1075-1175/oz in the June quarter. This target includes 50,000 ounces from Pogo, based on the equipment already at site.
Production guidance for the quarter is up 26-40% from the March quarter. While this is substantially higher, UBS believes it is credible. Northern Star traditionally reports a very strong June quarter because of a lack of maintenance, ahead of access to high grade ore. The investment in development during the first to the third quarters means access to higher grade stopes is greater in the fourth quarter.
Credit Suisse suspects the company will use Kalgoorlie toll milling capacity to improve Australian production, by accessing 50,000 ounces of stockpiled ore in order to cover for the Pogo shortfall. The March quarter delivered only 21% of the full year guidance at the mid point and Pogo provided only 13%. FY19 production guidance has been maintained for 850-900,000 ounces of gold.
The stock has had a premium rating, driven by consistently beating expectations and guidance. UBS suspects a repeat of the last couple of quarters may put this premium at risk. Nevertheless, recent weakness in the share price has improved the risk/reward balance and the stock is now at narrow discount to the broker’s valuation.
Canaccord Genuity considers the pullback in the share price offers an attractive entry point for a well-established gold producer. The broker, not one of the eight monitored daily on the FNArena database, retains a Buy rating and $9.55 target. Credit Suisse asserts the company’s reputation and that of management is firmly hitched to the performance at Pogo.
Pogo
Only five of a planned 16 new items of underground equipment arrived in the March quarter at Pogo. It will take several quarters for the higher grade ore from stoping to reach the 60% of feed that is anticipated. The company is guiding towards a 60:40 stoping to development ratio in coming quarters. UBS is confident the new mining method is already improving the cost base of the mine.
While the quarter was negative, the broker believes it will be ultimately immaterial if the turnaround at Pogo is successful. Management has only controlled Pogo for six months and believes it will take 18 months for the full benefits of the mine plan to occur.
Canaccord Genuity agrees and foresees a bright future for Pogo, as the issues can be comfortably addressed over the next 6-12 months. The broker forecasts Pogo at a steady state run rate of 300,000 ounces per annum by FY21.
Credit Suisse notes the underlying potential of Pogo is based on geology and the company has assessed it as a repeat of the Jundee story, requiring infill and extension drilling to support higher production and longer mine life.
UBS is also confident the new equipment at Pogo should lift productivity. A maiden JORC reserve is expected from Pogo as well as updates to resources and reserves and other assets at the results in August.
UBS remodels Pogo where forecasts were too optimistic on throughput and grade, but suspects that the next catalysts for the company will be positive. Pogo also remains key to Macquarie’s longer-term outlook for Northern Star. The broker awaits FY20 production guidance and the long-term outlook as well as the maiden resource/reserve statement.
Incorporating the soft March quarter result and a lift in production expectations towards the fourth quarter guidance means Macquarie lowers FY19 estimates for earnings per share by -21%. Reducing grade growth expectations at Pogo means FY20 estimates are lowered by -8%.
Kalgoorlie
Credit Suisse also points out the much vaunted South Kalgoorlie operation is opaque and the promises for the near term cannot be assessed adequately. There is no visibility on production or cost sustainability, as the depletion rate of ore sources is unknown.
Management had previously indicated that FY19 guidance was conservative, particularly with respect to the assumed negligible contribution for the Jubilee mill. This ‘conservative’ description now appears to Credit Suisse to be less likely.
However, Kalgoorlie and Jundee are expected, in combination, to deliver the top end of guidance and provide a very strong June quarter. Management has stressed that guidance comes from deferred grade and not the pulling forward of grade from FY20.
FNArena’s database has two Buy ratings, two Hold and three Sell. The consensus target is $8.30, signalling 0.5% upside to the last share price. Targets range from $6.60 (Morgan Stanley) to $10.30 (Macquarie).
