What is not to like?, page-17

Northern Star Resources (NST)
Analyst: James Brennan-Chong, UBS
Recommendation: Neutral (previously sell)
Price target: A$5 (previously $4.49)
Thursday’s close: $5.06
Reason: The outlook lengthens
Comments: We upgrade NST to neutral from sell, as mine life uncertainty has been removed following a larger than expected reserve and resource update. With a mine plan of six years based on reserves and 10 years on resource, we believe NST has genuine mine life that underpins the share price today. We value NST with just the reserves at A$4.16/share. We then apply a 20% premium for future resource to reserve conversion as well as for an appreciation of the high quality operational team, leading to our A$5/share target price. While the outlook from here appears balanced, further upside could be difficult as all of NST’s exploration targets today are likely needed to underpin the 10 year mine life based on resource. If we value 100% of the resource, our NPV would lift to circa $5.67/sh. NST has provided a targeted production rate of 600,000ozpa, but without a grade profile, the market is left guessing what the grade profile will be and subsequently what milling rates are needed to meet guidance. If the reserve grade is realised, meeting guidance would likely require third-party tolling at the Kalgoorlie Ops and this could crimp margins. Moreover, we note that grades continue to be on the decline at both the Kalgoorlie Ops and at Jundee. Should grades continue to fall, milling and/or toll treatment may continue to lift against market expectations. A more pertinent question could be when will NST secure access to a third-party mill? Our secondary concern is the shifting gold priced used, and we note the resource is modelled with a $1750/oz gold price. We view NST as a quality and profitable gold producer trading at a premium valuation (1.2x P/NPV vs sector 1.0x). With the mine plan set, exploration leverage has reduced in our view, as any future discoveries or resource extensions are likely to add to mine life rather than lift production and this should subsequently have a more modest impact on our valuation. Key upside risk centres on the grade profile and securing third-party tolling. The downside risk, we think, is that the market has perhaps overestimated the grade profile medium to long term or that third-party access is delayed, leading to a deferred ramp up at the Kal Ops. Our NPV lifts by 9% following the incorporation of the updated mine plan. With a 5% discount rate, our NPV approaches A$4.60/share.