Northern Star Resources Ltd

ASX:NST

Earnings Call Transcript 2021-Q1

[Operator]

Thank you all for standing by, and welcome to the Northern Star's September 2020 Quarterly Results. [Operator Instructions] I would now like to hand the conference over to Mr. Bill Beament, Executive Chairman. Bill, please go ahead.

[William James Beament, Executive Chairman]

Good morning, and thanks for joining us. On the call, with me today is our Chief Executive Officer, Stuart Tonkin; our CFO, Ryan Gurner; and Chief Geological Officer, Mike Mulroney. It has been a very good quarter for Northern Star on all levels. Our operational performance was strong, with production at the upper end of our quarterly guidance. The results at Jundee were outstanding and Pogo is really starting to perform well and generate excellent free cash flow as we always knew it would once our changes were in place embedded down. These numbers show the Pogo plan is delivering. The Kalgoorlie operations had a couple of challenges, but much of that was related to mine sequencing and a planned roaster shutdown, so it was not unexpected. Given the reasons for the lower production and its subsequent impact on costs, we expect the results to greatly improve over the course of the financial year. The strength of our operations is reflected in our underlying free cash flow of $132 million for the quarter, which came after investing $42 million in growth CapEx and exploration and an unaudited NPAT of $100 million. As we foreshadowed in our annual guidance, the September quarter was budgeted to be the lower on a proportional basis at around 22% of the year's forecast output. So we are comfortably on track to achieve our full year guidance. In addition to the strong operating performance, one of the major highlights for the quarter was the doubling of reserves to 10.8 million ounces while resources grew 67% to 31.8 million ounces. This was an outstanding result for 2 reasons. First, it shows we are growing our inventory against the global trend of declining inventories; and second, it will underpin further growth in our production profile again when many of our peers have falling or flat production. In simple terms, our story is one of growing inventories, growing production and growing free cash flow with a low capital intensity. Our production is set to increase 40% over the next 3 years while costs will fall 10%. This is a very similar theme to that outlined by Saracen when it announced its strong quarterly results last week. Putting these 2 very strong growth stories together and generating synergies of up to $2 billion in the process is a huge opportunity for all our stakeholders. A gold mining company is only good as its asset, and the merged company will have a collection of Tier 1 assets in Tier 1 locations with an enviable growth outlook. I will now hand over to Stu.

[Stuart Peter Tonkin, Chief Executive Officer]

Thanks, Bill. Yes, this morning, we are pleased to report our September quarterly gold sales of 227,000 ounces at the upper range of our quarterly guidance, which has quarter-on-quarter growth to a full year production of 940,000 to 1.060 million ounces. This growth trend continues on a year-on-year basis to organically lift growth production to 1.25 million ounces driven from our highly profitable Yandal and Pogo operations, which, in turn, lowers all-in sustaining costs by 10%. Bill mentioned some financial highlights. And in addition to these, our balance sheet now stands at $470 million of cash, bullion and investments with $500 million of bank debt. And this is after repaying $200 million of debt and $200 million of fully franked dividends in the September quarter. We continued to reduce hedges with 28% of production sold into hedged commitments in the quarter. We have now approximately 13% of production hedged over the next 3 years and will enjoy increased exposure to higher spot prices. Our highlight for the quarter is a continued improved performance demonstrated at Pogo operations in Alaska, with 51,000 ounces sold at USD 1,199 an ounce all-in sustaining costs, and that's despite the constraints imposed due to the impact of COVID there. Pogo is continuing to climb the leader board, and we see the quality of the operations through improved grades and recoveries with mined volumes reflective of the present restrictions due to COVID. We maintained development rates of 1,200 meters per month, focusing on the Leise, South Pogo and Fun Zone, and we intend to lift to 1,500 meters a month with established 5 mining zones as the staffing restrictions ease. Long-hole stoping contributed 61% of the ore feed during the quarter, and we milled 209,000 tonnes at an impressive 8.9 grams per tonne to produce over 53,000 ounces at the upper end of our guidance range. Our present COVID measures remain in place given the increased community cases in the state and I praised the Pogo team to maintain these control measures to ensure the health of employees and community and maintain business continuity there. The Yandal operations, we started the financial year strong with 73,000 ounces sold at AUD 1,209 all-in sustaining costs, with a strong contribution from Ramone open pit ore source and continued investment in Jundee underground development across multiple production horizons. The expanded mill achieved 708,000 tonnes processed for the quarter an annualized rate of 2.83 million tonnes per annum. And we will continue to optimize the plant for improved recovery and throughput, given growth plans in the region. In the Southern Yandal region, we advanced activity to establish the Julius and Orelia open pit as future production centers, with a dedicated team established to lead this growth. Our mill studies of Bronzewing refurbishment or an expanded Jundee plant have now included the Thunderbox expansion study as part of the proposed merger with Saracen. This would contribute substantial synergies to the combined companies for lower unit cost for haulage and processing. At the end of the quarter, Jundee had 92,000 ounces of gold contained in stockpiles and gold in circuit. Now to our Kalgoorlie operations. We delivered a weaker production quarter of 49,000 ounces sold, with planned maintenance on the Kanowna Belle mill and roaster, lifting costs and reducing gold produced. And as a result, we increased the concentrate inventory, which will be processed over subsequent quarters. The overall reduced mill tonnage in Kalgoorlie operations also reflects the cessation of utilizing third-party toll milling. And at the end of the quarter, Kalgoorlie operations gold inventory in stockpiles and circuits nearly doubled to over 51,000 ounces. We maintain our stated annual guidance for production and cost at Kalgoorlie with mine sequencing weighted to the second half of the financial year and production growth and processing catch-up of inventory. Kalgoorlie operations continued to generate good cash flow as the all-in sustaining costs is very close to the all in costs, and this region has significant leverage to gold price that we are experiencing at present. Now for KCGM where we continue to make improvements through the combined efforts with our partner, Saracen and the KCGM team. Our open pit mining physicals lifted by 28% with mined ore increasing by 42% from the previous quarter via our mining activity in three zones of Golden Pike, Morrison and the Oroya Brownhill. Underground mining physicals were further improved by 25% from previous quarter, utilizing the lower grade sublevel cave material as well as primary sources from Hidden Secret zone. Northern Star's attributable production totaled 54,000 ounces sold at Australian all-in sustaining cost of $1,461 an ounce, and we are continuing a raft of measures to reduce costs and drive productivities across the operation, which has been adopted and driven by the KCGM team. In recent announcements, we have mapped out the production growth of this long life asset to a plus 675,000 ounce per annum producer at 100% by FY '28. And this is underpinned by an impressive 9.7 million ounce reserve and significant exploration potential on a world-class geological system. I would now like to hand to Mike Mulroney to discuss progress on our $100 million exploration program for FY '21.

[Michael Geoffrey Mulroney, Chief Geological Officer]

Thanks, Stu, and good morning, everyone. Northern Star's exploration and development activity continued its momentum across the Australian operations with drilling activity at Pogo steadily increasing across the quarter. Beginning at Jundee, the expanded underground and surface drilling fleet was strongly focused on exploration programs. Within the mine area, exploration drilling on the larger Invicta Gap area continues to generate encouraging results on multiple fronts, while further north, drilling has highlighted multiple mineralized structures beneath the Griffin and Cook mining areas. Further south, drilling has also intersected new zones of mineralization in the footwall of the main Barton system, extensions to the Fisher and Menzies trends and depth extensions to the main Barton, Nimary and Gateway systems. Moving to the Kalgoorlie region. At Kanowna Belle, underground drilling in the upper levels of the mine continues to expand the high-grade Sims and Troy systems. And in addition, recent drilling also significantly extended the Velvet mineralization both up and down plunge. Across the Kundana, underground drilling into the extensions of the Pope John and Christmas deposits continues to return results in line with expectations, while further south at EKJV, the drilling has successfully extended the strike extent of the Pode system north from the Pegasus mine, and define new mineralized services within the hangingwall at Hornet. Underground drilling at South Kalgoorlie was particularly successful, extending the north trend some 160 meters down plunge and identifying a new high-grade parallel trend, while surface drilling into the Mutooroo area has also exceeded expectations, expanding the mineralization above the main NOZ mining area. During the quarter at KCGM, KCGM successfully transitioned to a new underground drilling contractor at Mount Charlotte. Resource definition drilling at Belgravia and Kal East produced results in line with expectation while exploration drilling into the Unit 6 stockwork and Duke prospects intersect the significant mineralization in all holes. Elsewhere, surface RC at diamond drilling across the Fim South area continue to define additional unmodeled mineralization both within the in-pit saddle area and areas adjacent to the planned pit shell. At Pogo, underground drilling activity has steadily increased across the quarter with improved productivities. Production and reserve definition drilling across all the major production areas have produced strong results, with excellent intersections from numerous unmodeled structures, particularly in the Leise 2 and South Pogo areas. In addition, a substantial surface drilling program has commenced at the eastern end of the Goodpaster trend to define potential resource areas for further evaluation. Regionally, exploration activity steadily resumed across the quarter in line with changes to regulatory and internal COVID-19 protocols. Surface exploration within the broader Yandal tenure resumed with RC and diamond drilling at Corboys. Earlier results indicate a significant growth potential for the area with broad new intersections recorded within multiple drill holes across a wide area. The Corboys trend has now been traced for over 15 to 20 kilometers, with many areas remaining completely untested. Within the Kalgoorlie area, surface RC drilling at the Golden Hind prospect within the East Kundana Joint Venture returned multiple shallow intersections within the Strzelecki structure south of the Raleigh mine. Further RC drilling is in progress to define a potential new open pit resource. At South Kalgoorlie, regional exploration in the Tindals near Coolgardie recorded significant new intersections at the Golden Eagle and Tindals anticline areas while sampling of historic drill core has revealed extensions to the main lode and hangingwall systems across the historic Barbara mining complex. Elsewhere, further exploration in the Carbine area continues to demonstrate the growth potential of this area. Infill surface definition of drilling at Paradigm, successfully consolidated the geological model with excellent assay results. Surface drilling at Phantom and Anthill prospects continue to expand the mineralization trends while the first hole in a diamond drilling program beneath the Carbine mining area has successfully intersected multiple mineralization zones with visible gold exceeding our initial expectations. I'll now return the call to the moderator for questions.

[Operator]

[Operator Instructions] The first question for today comes from Sophie Spartalis of Bank of America.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

I just wanted to get some further comments around Kalgoorlie. I understand that you had that mill shutdown and the roaster shutdown. But just can you talk through the pathway ahead for the remaining of this year and into '22, please?

[Stuart Peter Tonkin, Chief Executive Officer]

Yes. Thanks, Sophie. So obviously, last year, we produced 317,000 ounces. This year, we guided 270,000 to 300,000. And coming off a strong quarter 4, we understood that we had that planned maintenance in the plant. And you'll see GIC has lifted significantly, and we hold in stockpiles and GIC, early 51,000 ounces in Kalgoorlie due to that delayed processing of that material. So we'll catch that back up as we get that through the roaster and refined into gold sales. So we're still maintaining that full year guidance for production and costs. And our intention long term is Kalgoorlie is a significant 300,000 ounce producer, we've mapped that out. It's really the balance of the milling capacity. And obviously, this proposed merger on the front with combined milling infrastructure that can help liberate some of that material that's there. So we've probably mapped out those options on using coal mills, expanding our current mills or using combined mills going forward.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. So yes, that was my follow-up question is in regards to once the merger is consummated, as the milling mining constraint balance. So can you just talk through that in a little bit more detail then? Because given that you haven't used third-party tolling this quarter, that seems to have the safe -- is that for the rest of the year that you won't be using third-party given that you've got the Saracen mill coming in?

[Stuart Peter Tonkin, Chief Executive Officer]

Look, we've still got options there and look, and the time for the synergies to come in place is still over the next 6 to 9 months of valuation on that. And obviously, they've still got to get accepted for servicing shareholders. So in that regard, but I'm not going to give away cash margin on toll milling material at the moment. And the quarter impact which was largely driven by that roaster shut. So we've got spring capacity in that plant. We can catch that back up, the concentration sitting there so it's big risk. And yes, there's 20,000 ounces sitting in GIC and 51,000 in stockpiles and GIC. So it's a -- it's sitting there, really, at the bank.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. Sorry, Stu, maybe I can ask this one different question. Just in terms of the toll treating, is that more of an ad hoc decision then that's going to be made for the remaining part of the year? Or how much lead time do you planned that out, whether you use it or not?

[Stuart Peter Tonkin, Chief Executive Officer]

You're right, it's ad hoc, and it's always subject to that margin, Sophie. So we've all going into a lot of those mills around the district. We want to make sure we're not giving away margin, giving away our cash flow. So expect that South Kalgoorlie to also take that fee. So it's -- we're trying to match our mining to our milling volumes.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. No, that's clear. And then as quickly, across to Pogo, it seems very much subject to the broader Alaskan COVID cases, but certainly seems to be in a pretty good position to bounce back once they are alleviated. Just in terms of the expected timing, can you just maybe provide some color around the broader COVID issues in Alaska? And the impact on timing on when you think you can open up those -- the increased front, please?

[Stuart Peter Tonkin, Chief Executive Officer]

Yes. So look, it's a really difficult one to answer. We can't predict the way it's going. But look, what's prevalent is across the state, cases have increased. We still have all the same protocols and management systems in place and are dealing with a very, very well and so credits to the team there, how they're managing through that without materially impacting through to the project. But we still see our physicals down sort of 20-plus percent because of the restricted crews on site. We've still got the construction crews expanding the processing facility up to 1.3. And Mike is going to increase his diamond rigs as well, drilling at Goodpaster. So it's just managing those team sizes and working on that. But what we are doing, we're obviously concentrating in the 3 main zones, your Leise, your Fun Zone. And basically, we'll put the development of focus there. And you can see some really impressive development grades 10 gram per tonne. That's above what model is, but they're showing you good signs of where the long-hole stoping grades are leading to. So all of those ounces at the moment, the 51,000 sales, the 53,000 produced is around about 2/3 of the volumes that we intend to get there. So it is that equation as we lift volumes. It's just very clear to map our pathway to 300,000. The timing, of course, we're getting better and better at managing it, but the timing at the moment, we've obviously mapped that out over the next 2 years.

[Operator]

The next speaker is Levi Spry from JPMorgan.

[Levi Spry, Research Analyst]

First question, just on grades, underground at Jundee and maybe at Kalgoorlie as well. Can you just talk through the mine sequencing? Is that -- so that -- how much of it into the end of the year is driven by volume and how much of it is driven by grades? And maybe what were the risks around the grades going forward?

[Stuart Peter Tonkin, Chief Executive Officer]

Yes, Levi, it's Stuart again. Just look, definitely that, we give full year guidance given the conversations on previous quarters. We also gave quarterly percentage proportion, and that's recognizing our mine plan. So you typically see us in a new budget year, put our development in place, open up in new areas, the stoping follows that. So that is typical of where we cycle our budgets and cycle our investments as we improve growth CapEx and open up those new fronts. But at the end of the day, we maintain our full year guidance and they're reflective of the mining sequence in front of us.

[Levi Spry, Research Analyst]

Yes. Okay. And just a different sort of question. I've noticed that you include all-in costs now. And I think somebody else did that today. I think maybe it's the first time I've noticed. Is this sort of a bit of a trend? Can you maybe talk through why you're doing that, what you think it means to the industry be using that as a metric?

[Stuart Peter Tonkin, Chief Executive Officer]

Yes. Look, I guess there's been commentary along the journey of all-in sustaining costs, and once you try that, use that as the normalized number across the group, I guess what we're trying to differentiate is, we've got very cheap capital growth, low-capital intensity for our organic growth in the next few years. And it's really demonstrating that, that exploration of growth capital that sits on top of the all-in sustaining costs to get to the all-in cost. It's less than $200 an ounce. So it's very cheap capital to grow. So the majors are reporting this way. That's a new peer group for us. It's really important that we show that all-in cost for people.

[Operator]

[Operator Instructions] The next question comes from Rahul Anand from Morgan Stanley.

[Rahul Anand, Equity Analyst]

Look, I've just got a couple on Pogo, please. Firstly, I'll start with a grade profile there. So to get to that 300,000 ounces level, you basically just need a grade of about 8 grams a tonne at the expanded mill rate. Yet if we look at this quarter, you're running at about 8.9, and you're also mentioning how the long-hole stoping side is being good grades come through. How should we be thinking about your long-term forecast or your medium-term forecast rather for that grade profile and how this should shape going forward? That's the first one.

[Stuart Peter Tonkin, Chief Executive Officer]

Yes. So it's probably important to focus on the reserve grade of 8 grams per tonne. And really what we've modeled our plan to get to 300,000 ounces is that expanded mill at 1.3 million tonnes at that reserve grade of 8 grams, 90% recoveries get you there. There are certainly opportunities. You can see some spectacular drill hits in the set across that ore body. So you'll -- we will have peak moments in high-grade stopes that from time to time will contribute to that -- those sort of uplift. But I just expect that continued growth in volumes. And the extra grades are a good kicker. But our base plan is designed around reserve grade. At the moment, we're in the 3 main stoping zones intend to get the north zone and east states online as well as we are allowed to get that development up to sort of 1,500 meters a month. But at this stage, I think it's around that 8-plus grams, and it's been very pleasing to see 10-gram development grades coming through. But it's early days. We've got a lot of investment in diamond drilling, getting more confidence around the model. We're introducing new mining techniques there, with formidable [indiscernible] in the development that reduces dilution. All these things is an upside to the current base plan, which is fairly conservative.

[William James Beament, Executive Chairman]

Yes. And just to add, Rahul. It's Bill here, is like what should we've been articulating for a number of quarters now as we start opening up these new mining areas, the grade is not changing. We're getting into new areas, and we're introducing long-hole stoping. It doesn't mean our grade is going to decline. If you look at the development grade, as Stu said earlier on, that is a good leading indicator where things are going. But as we said, as we open up these new areas, we get into fresh ore sources. They're all great grades, but it doesn't mean we're going to have a lower grade mine in the future because we're going into bulk mining. We're just mining into new areas, which we articulated are going to get better in mine plan.

[Rahul Anand, Equity Analyst]

Okay. So just as a follow-up then. I mean, I guess, to put it simply, how is the reconciliation going so far? And secondly, how should we think about the grade profile for the rest of the 3 quarters this year?

[Stuart Peter Tonkin, Chief Executive Officer]

Yes. Look, we've given our guidance out there. But what I'll say is we're getting -- we've got a lot of -- the drilling obviously suffered last year because of COVID. We've got 62% of our budgeted drilling in, but we're now back up to 8.5, 9 diamond drill rigs into the mine. And so that is giving us very, very good definition for the mining crews and geological crews. So we expect stronger performance. We already started this quarter great. We already pulled 20,000 ounces for this month alone. So the teams at Pogo had done an exceptional job with the restrictions they've got, but we're tracking really there. But I will come back to have a look at the cost of the Pogo. They've dropped 15 -- nearly 15% from last financial year and all-in sustaining costs. We've made some great free cash flow generation there, and it's only going to get better.

[Rahul Anand, Equity Analyst]

Okay. And then the second question, and perhaps an easier one. The 1.3 million tonne per annum run rate expansion, how far progressed are we? Is that nearly done now? Or what are some of the key things left?

[Stuart Peter Tonkin, Chief Executive Officer]

Yes. So I guess we mentioned were sort of over 60-odd percent. We've basically we'll have that in place by mid-calendar year. So yes, June '21, we'll have that commissioned, whether we'll have the mining volumes to that yet at that point is the question. But that's why we've mapped out 2 years to get the 300,000 ounces. But the teams over the civils are all on place as the temperature is dropping. I think it's minus 10 degrees there at the moment. We make sure we have all that locked up and then over the winter, they'll fit-out the internals, but that will be commissioned by mid-calendar year, next year. And look, we're obviously also looking at that 1.5 million tonne expanded capacity. So as we're building volume, there's a bit of flex there in what we're doing it. But that's -- that allows us to drop the -- teams off-site, construction teams off-site, add rooms with mining crews and then, obviously, focus on all the mining volumes of the 5 zones instead of the 3 we're concentrating on at the moment.

[Operator]

The next question comes from Matthew Frydman at Goldman Sachs.

[Matthew Frydman, Research Analyst]

Just a quick one for me, I guess, on CapEx. And thanks very much, as Levi mentioned, for providing that all-in cost number as it is an important one. But just trying to, I guess, do the math on the growth CapEx that you guys spent during the quarter. You called out in the text there, I think, that you spent $42 million on growth and exploration. And then in the waterfall there, you've got $24 million for exploration. So if I back that out, your number for growth CapEx in the quarter is $18 million. If I'm not mistaken, your guidance for the year is closer to $200 million on growth CapEx. So can you talk through, I guess, is that a timing of Capex? Is there any projects there that are, I guess, back-end weighted during the year that are driving that $200 million growth CapEx number? Or how should we think about the timing of growth CapEx over the remainder of the year?

[Ryan P. Gurner, Chief Financial Officer]

Yes, Matt, Ryan, here, mate. Thanks for the question. Look, you're right. Top timing, yes, we're obviously going through that, particularly KCGM, the OBH area and Morrison. And so we're getting some revenue out of that and its incentive crediting the cost. So once that comes into commercial production and once we open up and do more development there over the next 3 quarters, which is what we've guided around at $99 million. We certainly think that, that will be the run rate. So broadly, yes, it's timing. And the CapEx this quarter was mainly at Pogo with that expansion plan and then some development at Jundee. So yes, it is timing. So we still expect the guidance that we've given, which is that $199 million we expect.

[Matthew Frydman, Research Analyst]

You raised a good point there, I guess, on the capitalization of preproduction ounces. Is the $198 million figure, I assume that's gross of any preproduction revenues? And then if that's the case -- sorry, that's saying that's net of the preproduction revenues?

[Ryan P. Gurner, Chief Financial Officer]

Yes. Yes. So the $99 million that KCGM net, yes.

[Matthew Frydman, Research Analyst]

Yes, sure. Okay. And so is it worth providing a bit of a breakdown of how much of that revenue has been capitalized during the quarter? Or will we get that disclosure out?

[Ryan P. Gurner, Chief Financial Officer]

I mean if you -- I mean, the preproduction ounces are there. So I think if you take this -- times that 14,000 ounces roughly times the average sale price, $2,493, that will give you the revenue. And look, happy to give the number. The CapEx, I think, is about $33 million, $30 million to $32 million, but that essentially was incurred. And then the revenue comes over-the-top of that, basically, while we're in that preproduction phase.

[Matthew Frydman, Research Analyst]

Yes. No. That's pretty great. I did miss that preproduction sold line there. Now that's very clear.

[Operator]

As there are no further questions at this time, I would like to hand back to Bill Beament for closing remarks.

[William James Beament, Executive Chairman]

Thanks. We've made a strong start to the new financial year, and our results are set to get stronger as the year progresses. Our operations are performing well, and they are underpinned by long mine lives. We have a strong growth outlook, and that growth is capital light. This means we can maximize free cash flow and overall financial returns. When you look at these results and notice from Saracen last week, they are a clear reminder of what great Australian mining company we stand to form from our merger. Thank you.

[Operator]

That concludes our call.