Northern Star Resources (NST) Analyst: Ben Crowley, Macquarie...

Northern Star Resources (NST)
Analyst: Ben Crowley, Macquarie
Recommendation: Outperform (previously neutral)
Price target: $9.50 (previously $7.50)
Thursday's close: $8.18

Reason: Pogo - straight outta the playbook
Comments: We resume coverage of NST after completion of a $175 million placement to part-fund its acquisition of the Pogo mine in Alaska. We value Pogo at $1,255 million or A$1.95/share. Our DCF is based on a production scenario for Pogo which assumes what we believe is a conservative seven-year mine life. We set our 1.4x NAV 7x OCF target price for NST at $9.50/sh representing a 20% TSR. We see support for this target in NST's EV/production multiple of US$3492/oz which we expect to re-rate to its previous level and that of ASX peers at $4500/oz. A A$9.50 share price implies an EV/production multiple of US$4642/oz. Incorporating Pogo in our forecast results in a material uplift in our earnings forecasts. EPS forecasts for FY19 increase 11% whilst FY20, FY21 and FY22 increase 22%, 32% and 38% respectively. Our target price increases by 27% to A$9.50/share. NST expects to update the Pogo resource estimate over the coming months. Further details on upside opportunities during the integration process would be a positive. The acquisition of Pogo is fully aligned with NST's stated strategy of operating tier one production centres in tier one jurisdictions. The mine will add substantially to NST's production profile and offers many opportunities for NST to deliver additional value in the same way that it has with its Australian assets. We expect to see near-term reserve growth as the substantial M&I resources are drilled out and also believe that the exploration potential outside of current resources is high. Operationally we expect to see NST deliver similar productivity gains and production increases at Pogo as we have seen at Kalgoorlie and Jundee. Whilst margins are the driver of profitability we still believe that demonstrating a clear growth path is critical for gold companies. In our view Pogo will deliver on both these fronts.