Northern Star Resources Ltd

ASX:NST

Earnings Call Transcript 2018-Q3

[Operator]

Thank you for standing by, and welcome to the Northern Star March Quarter 2018 Result Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Bill Beament, Executive Chairman. Please go ahead.

[William James Beament, Executive Chairman]

Good morning, and thanks for joining us today. On the call today, we have our Chief Executive Officer, Stuart Tonkin; Shaun Day, our CFO; and our Chief Geological Officer, Michael Mulroney.While they say the journey is better than the arrival, but in our case, nothing could be further from the truth. After a journey which started with timely acquisition of some Tier 1 assets 3 to 4 years ago, Northern Star is about to arrive at its stated destination, that is, a production rate of 600,000 ounces per annum, backed up by gold inventory, which provides mine life visibility of 10-plus years. And given the outlook for our free cash flow, we have absolutely 0 concern that our arrival at this destination will be anything but highly rewarding for shareholders.To get some idea what this increased production means, it is useful to look at the performance in the March quarter. We sold 120,000 ounces in the 3 months and generated $32 million in free cash flow. It is worth noting that this cash flow came after investing $33 million in the organic growth strategy. That marked the end of this major capital investment program to enable production to grow to 600,000 ounces per annum.Today, we have forecast production for the June quarter of 150,000-plus ounces. On the back of this, we have narrowed the FY '18 guidance range to 540,000 to 560,000 ounces at an all-in sustaining costs of between AUD 1,000 and AUD 1,050 an ounce.It is important to emphasize that it is the cash flow implications of this production growth rather than the headline figure itself, which is critical. That's because it is the cash flow which drives our financial returns, which, in turn, are at the center of Northern Star's organic growth strategy.The foundation of this strategy has been our exploration success. Not only has this enabled us to grow production, but it means we now have the 10-plus years of mine life visibility, which the market told us it wanted to see.So we have delivered the mine life. And now we are poised to deliver the significant higher production and free cash flow that goes with it. It is a tantalizing triumph, and it comes with no debt, and importantly, significant exploration upside is still on the table.Mike Mulroney will have some more to say on the exploration front shortly. But first, Shaun Day, our CFO, will provide a brief insight into the financials. And our CEO, Stuart Tonkin, will give you an assessment of the operational performance. Thanks, Shaun.

[Shaun Day, Chief Financial Officer]

Thanks, Bill, and good morning, everyone. It is a pleasure to be able to present the March 2018 quarter results, and I'll take you through some of the key financial aspects.Turning to the waterfall chart on Page 3, it provides an overview of cash movements for the quarter and the generation of $70 million in operating cash flow. The underlying free cash flow for the quarter is $32 million. During the March quarter, Northern Star acquired the South Kalgoorlie Operations, which included a $19 million cash outlay as part of the $80 million acquisition.On an ounce basis, the March quarter was very productive for free cash flow generation with the free cash flow per ounce up 17% from the first half. The driver of this improved translation of ounces into free cash flow reflects the focus of the business on [ our ] concentrated centers, with Jundee and the Kalgoorlie Operations generating higher margins and higher returns than the smaller assets previously within the portfolio.The year-to-date all-in sustaining costs is AUD 1,053 an ounce. The full year guidance range of [ AUD 1,000 to AUD 1,050 ] an ounce is unchanged, as we expect a strong production profile in the June quarter to significantly lower the full year all-in sustaining costs figure. Finally, the Northern Star hedge book stands at 319,000 ounces at $1,743 an ounce.In respect of the upcoming June quarter, given the recent spot market price and with around 115,000 ounces hedged at $1,747 an ounce, Northern Star is very well placed to achieve elevated revenue for gold sales in the June quarter and finish the year strongly on all financial metrics.The elevated revenue will further enhance the free cash flow generation from what is expected to be a strong quarter for production ounces. The June quarter run rate of 600,000 ounces per annum and subsequent free cash flow generation will be invested in appreciation of the growth delivered by substantial investment in organic capital to drive future returns to our shareholders. I will now pass the [ call ] to Stuart.

[Stuart Tonkin, Chief Executive Officer]

Thanks, Shaun. The March quarter has indeed set an important foundation to underpin our future production of 600,000 ounces per annum. To date, our team has demonstrated significant discoveries, hauling productive mines, but the process incapacity has held us back. And now with that capital improvement at Jundee, Kanowna and the acquired Jubilee processing plants, we are set to sustain the organic growth opportunity at these Tier 1 assets and harvest the fruits of their labor. At Jundee, our processing team delivered a mill throughput of 460,000 tonnes in the quarter. That's a 1.8 million tonne per annum run rate, with the month of March alone exceeding a 2 million tonne per annum capacity. This in turn has enabled the mining team to increase mining rate, with stope tonnes now set at 100 to [ 100,000 ] tonnes a month and planned development meters of 1800 meters a month. The Jundee operation has never been this difficult in its 20-year history. And it's a great credit to our technical staff and our contract partner, [indiscernible], to keep raising the bar. The strength of consistency at this Tier 1 asset is the multiple production fronts and the flexibility to place [indiscernible] of underground mines be optimum, with more than 5 active production zones and the Armada deposit -- Armada zone under development, further extensional drilling delivered at expanded plant in the next financial year.The Kalgoorlie operations, we also saw a 10% growth in production for the quarter, with 510,000 tonnes of ore mined, and more growth to come in the June quarter with Millennium set to make conventional production, having developed 3 kilometers of development in the quarter, predominantly in ore level and is on the eve of sustained production level.The significant addition to the portfolio at the end of the March quarter was the South Kalgoorlie Operations acquisition from Westgold. Primarily, this transaction underpins a processing capacity to deliver plus 300,000 ounces in Kalgoorlie, without the CapEx risk or delays associated with expanding our Kanowna plant. The HBJ underground mine and regional exploration potential on over 1,000 square kilometers has significant options for further organic growth in Kalgoorlie Operations.Westgold management ensured a seamless transition to Northern Star at the start of April, which demonstrates the capabilities of both parties to deliver value to shareholders in a win-win transaction.EKJV contributed an improved performance with increased development and ore tonnes in the quarter, with stoping alone now at a level of 60,000 tonnes per month, another production achievement not historically seen at this operation. Our own mining teams continue to optimize activity to drive value to Northern Star and their joint venture partners there.Kanowna Belle maintained strong production from all mining zones, and geological confidence surrounding Velvet led up to increase the core underground dominant regions to further defined extensions, which is starting untested methodology.So with our strategy coming to fruition, we are set to deliver FY 2019 (sic) [ 2018 ] guidance on a narrowed range of 540,000 to 560,000 ounces at an all-in sustaining costs of AUD 1,000 to AUD 1,050 an ounce. This is without any production contribution from the South Kalgoorlie HBJ underground mine. And with the CapEx tonnes behind us, we are well positioned to maintain both their Tier 1 assets of Jundee and Kalgoorlie at plus 300,000 ounces per annum each to generate strong cash flow and superior return for shareholders.I would now like to pass to Mike Mulroney to discuss our exploration success.

[Michael Geoffrey Mulroney, Chief Geological Officer]

Thanks, Stuart. Good morning, everyone.It was another very active quarter for the exploration group this quarter, with a lot of energy focused, particularly, to the Jundee region.At Jundee, most of our rigs underground now are focused on reserve and resource definition, with a very high concentration of asset in the Armada zone, which covers approximately 3 kilometers across the mine. So this region now -- drilling out of the extended Armada trend, which includes the Nexus and the Revelation areas where you saw a midyear update to our reserve and resource position.Elsewhere on the surface, the drilling into the new Zodiac discovery, which we announced late last year, has continued, and the initial program has been completed by some underground around the surface. That included drilling of the 2 final deep holes from surface 1, which included a new Australian record depth of 3,214 meters, which was successfully completed by our contractors, and we're now running downhole launch across that whole trend. What we've achieved there, in initially outlining the trend of over 1.5 kilometers long, has been quite an outstanding success from our seismic assets at the Jundee mine site.Regionally, at Jundee, our efforts are being focused in the area around the new Ramone discovery, about 35 kilometers south of the Jundee mill. Both diamond and RC drilling programs have been completed down there, and we're well underway to prepare a maiden resource and reserve statement for the midyear announcement later this year. Elsewhere, we're continuing our regional air core drilling programs across new targets, particularly in the Ramone area, where a number of new trends are emerging.Moving further south to Kalgoorlie. At Kanowna, the 4 rigs underground at Kanowna are concentrated on drilling additional hanging wall extensions owned in the mineralized ore body, where we've had some considerable success in recent times as well as extending the discovery of Velvet. The new Velvet zone and the areas back towards the mineralized ore bodies is providing some interesting results, and we expect to have extent of the Velvet zone considerably back towards the mineralized mining areas.Across the EKJV, drilling within the mining complex itself is focused at the Pegasus end of the mining complex, where drilling on the K2 system and also of the hanging wall zones at Pode and Hera is generating reasonable success and providing extensions of those [ old systems ] further to the north depth. We've also commenced drilling at Raleigh South on the new drill platform. As that drill plan has progressed during the quarter, we are seeing continued extensions of the Raleigh South trend with mineralized intercepts, including visible gold coming from most drill holes.Just to the north, at our Kundana properties, exploration has continued at Millennium, both at depth and to the area between Millennium and the historic Centenary pit, and those programs are currently also still in progress. Further south, we are doing extension drilling on the Strzelecki line at Strzelecki South and the adjacent Christmas area, which is a [ folder ] block of the K2 mineralization [indiscernible]. Again, all those ores have just been completed now, and we expect assays and upgraded resources to flow next quarter.Further north in Carbine area, regional exploration continues at Paradigm. We've completed major open pit. RC drilling program's up there, ahead of a new resource statement coming next quarter, and we've commenced regional exploration in the Carnage at the Three Eights prospect and Orinda testing historical anomalies on mineralized trends associated with the Ora Banda complex. And then further north at Tanami, on the completion of the wet season in the Tanami region, we recommenced exploration across all the sites up there. And towards the end of the quarter, we mobilized their drill rigs into the Tanami, and those programs commenced drilling activity on the Central Tanami zones to the south very rapid, of course. So we look forward to the results from those in the coming quarter.I'll now hand you back to the moderator for questions.

[Operator]

[Operator Instructions] The first question this morning comes from Lucy Spartalis from Merrill Lynch.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

This is Sophie Spartalis. And just in terms of the depreciation schedule, Shaun, can we just go through the expected depreciation level, sort of, '18 and going forward, please?

[Shaun Day, Chief Financial Officer]

Yes, Sophie. The way we tackle depreciation is we try to, kind of, get it into the outcome because when we look at depreciation, we just don't do it on the balance sheet. We look at our loss of mine model, we bake in the future CapEx, and then we amortize out across the full loss of mine and profile. So what that's meant to do is create consistency and predictability over the period and also what it stops is your last ounces carrying undue weight of your capital expenditures because they're not fully carrying the large CapEx and also part of the yearly CapEx. It's spread evenly across the whole ounces. So you really [indiscernible] continued predictability, and we do, kind of, give the [ DNA ], kind of, outcomes in our quarterly [ 8 months ] as you've seen in the table. So hopefully, that's also a useful guidance for you.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. So still maintain that, sort of, $145, $150 range for the group on an annual basis, even going forward to spot the CapEx spend that you just incurred?

[Shaun Day, Chief Financial Officer]

Correct because we've already effectively taken into account that piece of CapEx profile within our loss of mine, even when working on this year's CapEx. So it creates a very predictable and very consistent outcome.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Sure. And then just a quick one on the new production rate. Can we just get a -- sort of, a likely split, sort of, '19, '20? Is it roughly 300 each of the assets? Or we can expect Jundee to sort of accelerate quicker? Can we just get some idea of that profile, please?

[Stuart Tonkin, Chief Executive Officer]

Yes, Sophie, it's Stuart. We'll give that clarity [ now. Always updated trend ] and give that full year updated guidance. But that's what we -- we're running in that 300 at both those centers. [ On the mine-based side ] of that, we'll give that guidance update in August.

[Operator]

The next question comes from Kristie Batten of MiningNews.

[Kristie Batten]

This is probably for Bill. I'm just wondering, with the WA budget coming out next month, is there a bit of a concern that the gold industry might be in the firing line again?

[William James Beament, Executive Chairman]

Okay. Kristie, now I've got no idea. I'm not privy to what happens in the inner workings of the budget processes by government. So it's very hard to make a comment on that.

[Operator]

[Operator Instructions] There are no further questions -- actually, we've just had one pop in from Matthew Frydman of Deutsche Bank.

[Matthew Frydman, Research Analyst]

Just a late entry for me. I'm just wondering, with 150,000-plus ounces you guys are guiding to in the final quarter, wondering if you can give a little bit more detail around how much of that you're expecting to source, obviously, from the newly acquired Jubilee mill. And also, I suppose how much Millennium ore you're expecting to still go to FMR Greenfields? Obviously, understanding that you're going to give a much more detail, sort of, break down on your plans for Jubilee at [indiscernible].

[Shaun Day, Chief Financial Officer]

Yes. Thanks, Matthew, again. So in that 150,000 ounces in quarter 4, no ounces will be contributed from the newly acquired HBJ underground. They'll actually stock haul in prices the next 1 or 2 year. We have third party all going for that plants at the moment, so that's probably why that's securing during that quarter. So that 540,000 to 560,000 ounces for the year comes from that same asset base that we've guided for the month, too. As far as toll treatment, we do continue to utilize Greenfields, but you can say that, from that acquisition, is quite a strategic purchase to get that Millennium ore and hence, for the Jubilee plant, so that really underpins that growth that we've chosen already.

[Operator]

I'll now hand back to Mr. Beament for closing remarks.

[William James Beament, Executive Chairman]

Thank you. We've always said that Northern Star is a business first and a mining company second. Today's announcement demonstrates this because it shows the cash flow impact of that investment we have made in exploration and production growth. The increased production is just a means to growing our financial return. We're now focused on achieving our guidance for the June quarter and FY 2019 (sic) [ 2018 ]and growing the cash flow in the process. At the same time, we will continue our highly successful exploration campaign in the lead up to a revised resource and reserve update in the September quarter.Thanks very much for joining us on the call today.