Northern Star Resources Ltd

ASX:NST

Earnings Call Transcript 2021-Q2

[Operator]

Thank you for standing by, and welcome to the Northern Star December 2020 Quarter Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Bill Beament, Executive Chair. Please go ahead.

[William James Beament, Executive Chairman]

Thanks, and Happy New Year, everyone. Good morning, and welcome to Northern Star's December quarterly results and my last delivery of our quarter results as an executive of Northern Star. And I wish to thank my employees, management team, Board, business partners, all stakeholders and long-standing shareholders for your huge and enormous support backing myself and the company over the last 11-or-so years. Joining me on the call today are our Chief Executive Officer, Stuart Tonkin; our Chief Financial Officer, Ryan Gurner; and our Chief Geological Officer, Mike Mulroney. Today's results from Northern Star, and those of you who have already seen this morning from Saracen, are more proof of the world-class company that we are about to establish. Northern Star's December quarterly performance shows our assets are performing great and are well within our group guidance. At the operational level, the financial level, and the corporate level, our plan is coming together just as we had outlined.In simple terms, we are delivering on every element of the script we go to the market when we unveiled the merger strategy last October. This means we're on track to seize one of the greatest opportunities ever seen in the Australian gold sector. In fact, I'll go as far as to say that is one of the greatest opportunities currently on offer in our industry globally. Today's results further support what we have been saying since October, which is that we are creating a gold mining company that will be growing at a time when most of our peers are staying still or shrinking. But growth at a time when your peers have none of it, that's a sort of growth is special. And it is particularly special when it is organic growth because as we've shown over the years, that sort of growth which delivered strong financial returns. And I can assure you that the merged group will retain our commitment to maximizing returns for all stakeholders. Our strategy to deliver our sort of growth will be assisted by the vast synergies we will -- which will flow from this merger. The flexibility which comes from having multiple production hubs around Western Australia and the firepower to unlock the enormous exploration upside at our assets. I'm excited to show more on this exploration opportunity, which will be released in the June quarter.With the merger with Saracen now just awaiting final court approval, we are very well advanced on getting into the detail of our strategy for the merged group. We're not going to devolve into the details today. As you'll appreciate, there is plenty of work to be done to ensure we maximize these huge opportunities we have. I will now hand over to Stuart Tonkin, who will provide some insight into the quarter's results.

[Stuart Peter Tonkin, Chief Executive Officer]

Thanks, Bill. This morning, we are pleased to report our December quarter gold sales of over 252,000 ounces at the upper end of our quarterly guidance, which is quarter-on-quarter growth to a full year production of between 940,000 and 1,060,000 ounces. We remain on track for group guidance with a strong half 2 forecast. We also remain well positioned for planned organic growth with capital expenditure underway to deliver a 30% production increase over the coming 2 years.Our planning for merger integration and delivery of combination synergies is underway for the inclusion of Saracen and Northern Star's outstanding teams and assets. And Ryan will talk shortly to our strong balance sheet to support this growth.To Pogo operation in Alaska, we continued with an improved performance at 54,000 ounces sold, and all-in sustaining cost of USD 13.65 an ounce despite the constraints imposed due to the impact of COVID there. Restricted activity has meant prioritizing development and stoping zones to 3 main areas of Leise, South Pogo and Fun Zone. The diamond drilling is continuing with 8 rigs underground, including North Zone and East States with exciting results achieved across the mine. I thank the Pogo team immensely to maintain all control measures to ensure the health of employees and the community whilst maintaining business continuity throughout trying tops with over 100 COVID cases managed during the quarter.Long-hole stoping at Pogo continued and contributed 77% of the ore fee during the quarter, with total of mine of 202,000 tonnes at 9 grams per tonne. We are mining at about 60% to 80% of capacity due to the disruptions, and we continually reallocate resources to prioritize mining programs. Pogo milling match mining volumes at 203,000 tonnes at 9 grams per tonne to produce over 53,000 ounces at the upper end of our guidance range. Our mill expansion activity is continuing to enable the 1.3 million tonne per annum capacity by mid this year, but mining volumes will be needed to increase to meet this capacity.For our annual operations, we continue on track with 868,000 ounces sold at an all-in sustaining cost of AUD 1,203 per ounce. Underground development is set to increase with an additional development jumbo to make the fleet now fixed. We're also continuing significant exploration and definition drilling with 15 underground diamond drill rigs active drilling in-mine and near-mine targets. That remained the open pit -- the final open pit was mined in preparations for a future underground are progressing, remain stockpile supplement to Jundee mill feed, which processed 664,000 tonnes in the quarter, which is a 2.7 million tonne per annum run rate.Future open pit sources from Julius and Orelia progressed with drilling and planning activity continuing the milling studies will be concluded in the current March quarter to determine the ideal expanded capacity between Jundee, Bronzewing or Thunderbox plants. At the quarter end, Jundee had 81,000 ounces of gold contained in stockpiles and golden circuit.To our Kalgoorlie operations. We sold 72,000 ounces, albeit at an elevated oil sustaining cost of $1,968 per ounce. Our Kalgoorlie mines remain our highest cost operations but do benefit from the synergies realized through the sharing of resources in the gold fields. Financial half 2 will be stronger as we build back stockpiles and run processing plants at optimum throughputs, including increased roasting. We were able to increase concentrate treatment to reduce inventories during the quarter, which closed at 44,000 ounces of gold and stock and circuits at the end of this quarter. We will continue to draw this down throughout the financial year. Kalgoorlie operations continue to generate good cash flows as all-in costs are close to the all-in sustaining costs. We also had significant leverage to gold price across our resource base there and continue to have exciting prospectivity through in-mine and regional exploration activity. Now to KCGM where, with our JV partner, we delivered a strong quarter with our 50% contribution at 58,500 ounces sold at an all-in sustaining cost of $1,359 per ounce. The current performance at KCGM and the significant potential of its operation highlights the principal rationale for the merging of 2 great companies and single ownership of this asset. Improvements across the pit activity has seen total material movement increased quarter-on-quarter by 22% to an annualized rate movement of 60 million tonnes per annum. With new fleet planned and improved working faces across Morrison, Oroya Brownhill and Golden Pike zones, this will grow to 80 million tonnes per annum rate over the forward plan.The underground production was maintained from Mount Charlotte and Hidden Secret and rehabilitation works commenced to access the historic lower mine to enable further exploration extension drilling there. We are looking forward to combining the exciting growth plans established by Northern Star and Saracen on our Tier 1 assets to deliver a portfolio of 1.6 million ounces per annum, growing to 2 million ounces per annum whilst realizing the identified synergies that make this merger of equals such a compelling transaction.I would now like to hand to Ryan to discuss the financials for the quarter.

[Ryan Gurner]

Yes. Thanks, Stu. Good morning, all. I'm pleased to be able to present to you some of the key financial aspects of the company's 2020 December quarterly results. And we'll start with the cash flow waterfall charts as we normally do on Page 5, which provide an overview of cash, bullion and investment movements for the December quarter and the generation of $225 million in operating cash flow and $93 million of underlying free cash flow, which adjust for working capital movements and movements in the company's equity investments. Some of the key one-off cash flow items this quarter included a total of $45 million paid in stand duty in respect of both the Echo resource and KCGM transactions. A $10 million balance in payments of the finalization of the FY '20 tax year and repayment of $125 million of bank debt. At December 31 cash, bullion and investments stand at $372 million and corporate bank debt at $375 million.As illustrated by the top chart, the company invested a total of $105 million in capital during the quarter, which comprises approximately $68 million in sustaining capital and $37 million invested in growth capital. The $37 million of gross capital spend comprises $9 million at KCGM, which is net of the revenues realized from ounces recovered at Morrisons and OBH mining areas. Both of these areas now are in commercial production. Other major components of growth capital investment during the quarter included the Pogo plant expansion and underground development at Jundee. Approximately $27 million was invested in exploration during the quarter across all operations with the majority of spend at Kalgoorlie, Jundee and Pogo. Turning to the site operations where during the December quarter, the Australian ops sold 199,000 ounces at an all-in sustaining cost per ounce of $1,526, which takes the half year to 375,000 ounces sold at $1,534 per ounce. The December quarter for Yandal lots was broadly consistent with Q1 with 71,000 ounces produced and 68,000 ounces sold at a cash cost per ounce of $883 and an all-in sustaining cost per ounce of $1,203. At the end of the quarter, Jundee had 81,000 ounces in stockpiles in JORC. An improved quarter was recorded at Kalgoorlie operations with mine grade across all sites lifting in the December quarter with 72,000 ounces mined and sold at a cash cost per ounce of $1,452 and all-in sustaining cost per ounce sold of $1,968. Higher noncash stock movement costs were realized with the drawdown of gold inventory held up from the September quarter at Kanowna Belle. All-in sustaining costs at Kalgoorlie operations are expected to continue to trend lower for the remainder of the financial year.KCGM had another solid quarter with pretax free cash flow contribution of $42 million for the December quarter, and the operation continues to see cost reductions and productivity across the board. A total of 59,000 ounces were sold at an all-in sustaining cost per ounce of $1,359 with the Morrisons and Brownhill mining areas now into commercial production, which means cost from these operations are now reflected in all-in sustaining costs. Now to Pogo, where the operations performance continues to excel even with COVID restrictions, with sales of 54,000 ounces at a cash cost of USD 954 per ounce sold and all-in sustaining costs of $1,365 recorded for the December quarter. Prioritized decline in lateral advancement during the quarter resulted in additional capital investments, which sets up future quarters at the operation.Pogo's total site costs, excluding exploration investment, the plant expansion and the corporate allocation averaged USD 24 million per month over the December quarter. And Pogo is continuing to incur some additional operational costs from COVID-19, mostly relating to personal transport, accommodation, freight and additional cleaning. These costs are reflected in all-in sustaining metrics at the operation.And finally, during the quarter, the company delivered 48% of the total sold ounces into hedge contracts. No additional commitments were added during the quarter and at December 31, the company's hedge book stands at 350,000 ounces at $2,128 per ounce. This approximates just 10% of our annualized production over the next 3 years.I'll now hand back to Melanie for questions.

[Operator]

[Operator Instructions] Your first question comes from Nick Herbert from Crédit Suisse.

[Nick Herbert, Research Analyst]

Bill and team. A few questions from me, please. I might start on Mount Charlotte. Just wondering if you could talk to the program of exploration works you've got plan there this year. And also, what are the operating and development rates you're targeting? Noticed the drop-off in the December quarter, and also just a comment there, whether that was just purely due to the rehab slowing things down, but really interested in what your expectation is for rates going forward.

[Stuart Peter Tonkin, Chief Executive Officer]

Yes. Thanks, Nick. It's Stuart. So look, we lifted already the production sort of to 1.5 million tonne per annum from that underground. You're pulling some from primary states but also some from the Cave material. What we're doing across the board, obviously, 1.5 million to 1.7 million where we're operating out. We've seen instantaneous rate up towards 2 million tonne, but that's really because of the extra draw on the Cave, where we are targeting really from an exploration and mine life perspective, there's 1.9 million ounces of resource there, be able to be reviewed, drilled and potentially converted into reserves.So with the exploration drilling, we'll target that large resource. And the beauty is you've got multiple zones in and around the main Mount Charlotte orebody we see can actually have multiple production horizons. The work that started at the bottom of the mine is really just rehabilitating deep mines and access in the lower levels to get the diamond drills in. There's a long lead on that, but we see the extension of the main shale ore body as a good potential. It's really not been looked after years. But it's also some of these higher -- more shallow zones that are parallel to the main ore body.So the extra developments going into the rehabilitation to access for diamond drilling. And those mining rates will be more reflective of around that 1.5 million tonnes per annum. A couple of things we'll be doing going forward. We will be -- to test the synergies part of the treatment of Mount Charlotte ore. We will be moving material between mills between Kanowna, Pegasus and the Fimiston plant. As Tom spoke this briefly on the Saracen call earlier, there's some huge opportunities there to get benefits out of Charlotte ore body because there is 3 million non-refractory material underground there. So at this stage, new fleet being put into Mount Charlotte. So underground productivities we've seen mine life extending that.

[Nick Herbert, Research Analyst]

Okay. Great. And then on Pogo, just interested if you have any thoughts around sort of the vaccine rollout in the U.S. and when you think that may have, I guess, implications for your workforce, their productivity or whether that's second half of the year or you do have any thoughts around that?

[Stuart Peter Tonkin, Chief Executive Officer]

Yes. So the rolling vaccines out going to first responders in Alaska, and it has to be really probably focused on Alaskan residents. Look, we're -- nearly 50% of our team over there has, at some point, had COVID and recovered. And so we look -- it's a management thing at the moment, very hard to predict where it's going. We currently have 0 active cases. We've taken that into account in our guidance this year, and it's pleasing that despite those interruptions, we're still tracking at the top end of that guidance.So we're absolutely pleased with how the team's typing, managing, dealing with it as well as obviously got the expansion teams on the processing facility. So that will be commissioned as well as slightly increasing the exploration activity. So we've got the 8 underground rigs. We've also got 3 rigs on the surface giving out Goodpaster. It's difficult to book us, but what's been proven, they have relentlessly managed this for nearly 12 months now. And you can see the performance processing at 9 grams per tonne albeit at sort of 68% of the volumes that we will forecast over the next couple of years.

[Nick Herbert, Research Analyst]

Okay. And then final one, just a clarification, Stuart. I think you mentioned but I didn't quite catch it the studies around the refurbishment and the optimization of the Yandal sort of milling. Did you say that, that was due to be completed this quarter?

[Stuart Peter Tonkin, Chief Executive Officer]

Yes. So we've completed studies regarding the refurbishment of Bronzewing and/or Jundee expansion, and we put the CapEx associated with that in the Northern Star guidance plan. What I've said on the previous quarter was we are now evaluating the expansion of Thunderbox in that equation and the works in regards to that are underway at the moment. So that Saracen already had a sort of stage 2 expansion of secondary crushing going in, we'll take that sort of the 3.5 million tonnes per annum with Thunderbox. We're looking at a much bigger Thunderbox version, and we're still going through the details of that.So this quarter, we have all of those side by side. We'll go through the CapEx and the benefits longer term, the plan for the Greater Yandal, 600,000-ounce setter, and we'll be putting that through approvals through our systems. So yes, this quarter is a fair bit of the desktop work. And ideally, next quarter we'll be able to explain which one we're moving forward with.

[Operator]

Your next question comes from Sophie Spartalis from Bank of America.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Just a few questions from me. Firstly, just around Kalgoorlie, those costs are still quite high. I understand and appreciate that the production in the second half is expected to be higher. But can you just talk through the plan to deliver within the all-in sustaining cost guidance range of $1,650 to $1,750, just given that the year-to-date, you're at over 2000. Is that realistic to still land within the guidance range?

[Stuart Peter Tonkin, Chief Executive Officer]

Look, Sophie, thank you. We -- look, we've got plans to deliver that. There's still risk associated with meeting that top end of the cost guidance. But at the moment, we've got plans that's really volume-driven. Grades and recoveries have been good at our Kalgoorlie operations. It's really -- it's a volume place. We've been milling at that sort of 2.9 million tonnes per annum between Kanowna and South Kal, and we really need to be sort of 3 million, 3.2 million. So it's really a volume play. We have the added option of utilizing third-party coal mills as well as the increased merged portfolio, including [ Cara Sudan ]. So there's plan there to build in that. I'm confident we will meet the group guidance, whether individual assets move within that but what we've put out there is, yet very confident that we're on track as a group to make the guidance.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Yes, sure. So just in terms of then the fact that you're running at 2.9 million, you need to be at 3 million, 3.2 million. What's inhibiting that? Or why would that [indiscernible] to the guidance?

[Stuart Peter Tonkin, Chief Executive Officer]

Look, it's the mining -- yes. So it's the mining activity at Kanowna, Kundana, you see this sort of wave. That's why we also put back end or weighted guidance throughout the financial year as we're growing things because you need the development at the front end. You've seen development at Kanowna Belle be increased to access more of the stoping front. So it is a front-loaded to get it developed to get those steps online, and then you can be very efficient in the production side of that. So yes, that's just how our cycles go in the underground side of EKJV, the Millennium area as well as Kanowna.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. So with the issues around getting that development far and up ahead, is that what we're trying to resolve to?

[Stuart Peter Tonkin, Chief Executive Officer]

No. Look, we put quarter-on-quarter guidance showing that growth. And it wasn't -- we explained right at the start, it wasn't just Pogo-related. So it was across our assets. And you saw us in quarter 4 very strongly last financial year. And when we had our mine plans, you saw that build. So we moved from sort of 22% up to 28% of that guidance weighted from quarter 1 to quarter 4. But the good thing is we keep that trajectory growing into FY '22, '23. So it's absolutely while we put that annualized guidance out there. We're above that guidance in quarter 1 and in quarter 2. So it's to plan above that. And our Half 2 is forecast to be much stronger than Half 1.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. What about in terms of labor cost pressures? Are they starting to buy just given closure of borders around the Kalgoorlie area?

[Stuart Peter Tonkin, Chief Executive Officer]

Look, they're not there yet as people have jobs here, and they -- it's more pressure on nickel, copper, lithium, those sort of things, they start to put pressure on it. At the moment, we've already got as does Saracen sort of rewarding sliding scales and productivities and on gold price mechanisms that reward our staff and retain our staff related to that. So that's already embedded. And so funding, I do anticipate that in the next couple of years, put some pressure on labor costs, but it's not going to today it something we just got to manage and deal with.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Yes. Okay. And then what about consumables? Any issues around getting them into the state, any offshore stuff that's going to come in?

[Stuart Peter Tonkin, Chief Executive Officer]

Look, we've never had issues in relation to COVID issues, including Alaska, we've never had issues in regard to materials, plant materials. It's really the movement of labor. We're not dependent on FIFO interstate labor and we've Alaskan team as well that has managed through all that. So we haven't seen any pressure on lack of stock or lack of materials. It hasn't been an issue for us.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. No, that's great. And just in terms of the integration planning, can you maybe just provide some color on how much integration planning has been done and ready to, I guess, put in place and execute once the merger is approved?

[Stuart Peter Tonkin, Chief Executive Officer]

Yes. Look, so a lot of this work was done prior to the announcement of the merger because it was truced up and proved up to be seen and the team actually sat together to understand what it could look like. So that work was set prior to announcement back in October, those plans or that -- those tangible actions were already mapped out there. So in recent months, both companies are basically running their businesses. As you've seen the performance, Saracen announced earlier today. A great quarter, great half as its normal start. So from that regard, both teams are respectful to the result of the vote last Friday. But in many ways, in a couple of weeks, action will start. And both companies got great growth plans. It's really just gluing them together.

[William James Beament, Executive Chairman]

Yes. So it's Bill. Just to add to that is something I mentioned earlier in my feel is we're well advanced on putting the teams together. So yes, we had to be respectful of a vote. But the initial feedback and the feedback until the official guide on Friday last week was very positive. So we didn't sit idle as a combined management team. Ian really put his name on the office next to me pretty quick. And the team have been pretty much working hand-in-glove consistently because we don't want to lose time on the opportunities that we can create on the merged company. So I can assure shareholders that we're well advanced on that. And as I said earlier on, is we'll put more color out in the coming quarters on how that looks.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Yes. No, that's great. So just in terms of then the synergies, when can we expect the first sort of raft to come through?

[William James Beament, Executive Chairman]

Yes. Look, we're going to catch up as an executive in February together and then a wider management group in March to really develop the future group strategy, which includes all our organic growth, which we're well advanced on both management teams implementing those plans. But what the merger entity then goes on the verge beyond that. So we'll put that together this quarter, and we'll start giving a lot more color midyear this year.

[Operator]

[Operator Instructions] Your next question comes from Stuart McKinnon from the West Australian.

[Stuart McKinnon]

Guys. Responds a little bit off topic, but -- and it's probably one for Bill, given his affiliations with POSM. There was a story in the Aus today. I'm not sure if you noticed, Bill, but South32 COO, Jason Economidis, was speaking at the company's Cannington mine in Queensland. One of the comments he made was that some of the mining course students of -- some of the students who were doing mining courses involved with South32 were being -- partly being heckled at by co-students at uni because they're doing mining courses. And he was concerned that the sector could be losing the public relations battle with the sort of young people coming through and also expressing concerns about as a consequence of that, there not being enough graduates for the sector going forward. Were you aware of those comments? And if not, do they sound alarm bells to you? Or are you confident that it won't be an issue in terms of getting graduates and that public relations situation?

[William James Beament, Executive Chairman]

Yes. Look, I saw those comments today like you did in the Australian, which is probably an eastern state paper. But look, when you look at it, universities over in the eastern states, mining is a very small proportion of their intake. And you've seen my comments a week or so ago is unfortunately, the economies over there really don't see the connection of the resource industry, even though it's powering the Australian economy right now and obviously, keeping the nation of flight during a very interesting and difficult time of COVID.So in Western Australia, I think, what's very, very evident is our public understand the importance and the great connection to the resource industry, which like 70, 75 in the resource industry is based in Western Australia. So I wouldn't expect you see heckling in Western Australian unis and when you look at some of the developing sectors like lithium and the battery metals, like how can anyone hackle on the EV revolution. So we're going to need those skill sets to develop those resources to create those products for the futures of societies around the world. So I can't see heckling within Australia. I can definitely understand some elements over the East Coast because they -- again, reemphasizing they don't understand the importance of resources. I don't know what they live in or what they drive around if they didn't have the resources that come out of state fought Western Australia and elements of Queensland and New South Wales. All keep a life going on.

[Operator]

That does conclude your question-and-answer session. I'll now hand back to Mr. Beament for closing remarks.

[William James Beament, Executive Chairman]

Thanks, Melanie. Today's results and those you've seen from Saracen show our 2 companies are about to embark on a unique journey from positions of great strength. Our enlarged company is set to travel a path, which we have no doubt is lined with opportunities: opportunities for growth, opportunities to reduce costs, opportunities to unlock further value from our Tier 1 assets, and fantastic opportunities for our employees and business partners to continue with our growth and their own careers.We will also have the opportunity to attract the biggest investment houses in the world to our share register because we will offer them growth in a flat or shrinking industry, and we have genuine scale moving forward. Others can offer one or the other; but both, that's the Northern Star point of difference moving forward. Thanks for joining us today.

[Operator]

That does conclude your conference for today. Thank you for participating. You may now disconnect.