Northern Star Resources Limited (NST) Earnings Call Transcript & Summary

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

Good morning, and thanks for joining us. On the call today, we also have our CEO, Stuart Tonkin; and our CFO, Ryan Gurner. Today's results demonstrate the extent to which Northern Star is a growth story. We're growing our free cash flow and our gold inventory, most importantly, on a per share basis. We're doing it at a time when so much of the gold industry is shrinking, and we're achieving the growth while maintaining superior financial returns. We've never set production growth as a key objective. Northern Star's commitment to being a business first and a mining company second dictates that sustaining strong financial returns while growing free cash flow and mine lives is a priority. Today's results show that we are meeting these strategic objectives, and importantly, we are well placed to continue this growth trend. Our operating cash flow was up 76% in the 6 months from the same time last year at AUD 297 million, and EBITDA rose 45% to AUD 322 million. These results came from the sale of approximately 400,000 ounces. To put that in a forward-looking context, we're on track to meet our second half guidance of 520,000 to 640,000 ounces and delivering into a much higher realized gold price. This growth will be driven by further progress at Pogo where production is forecast to rise from 75,000 ounces in the first half to meet our second half guidance of 120,000 to 140,000 ounces and being a meaningful contributor to the group's free cash flow. The results of Pogo are now improving rapidly as the benefits of our new mining method and other changes flow through to the bottom line. The other key source of growth will be our half share of KCGM, which was bought into our accounts early in January this year. It is early days, but we are very happy with what we're seeing at KCGM, both in the terms of the current operations and the huge potential of the tie-up with Saracen. The joint management committee we set up has made an excellent start to life and it's already cleared that by pooling our respective skills and experience we'll extract the absolute maximum performance from the business over time. The review we both spoke about at the time of the December quarter is also proceeding well but still has some way to run. Our Australian operations posted a superb result with EBITDA up 47% to $352 million, and the EBITDA margin running at a very robust 52%. Today's results also see Northern Star maintain its long track record of being a dividend-paying gold miner. The interim dividend has been increased by 25% to $0.075 fully franked. This reflects our policy of paying out 6% of revenue, but it was calculated on the capital base through the KCGM acquisition. I will now ask Ryan Gurner to provide some more detail on today's results.

Thanks, Bill, and good morning, everyone. I'll now take you through some of the key highlights of the December 2020 half year results presentation. Firstly, Slide 4 which provides an overview of the key financial highlights for Northern Star during this December half year, outlining a 54% increase in net profit to $127 million, 179% increase in underlying free cash flow to $116 million, a 45% increase in EBITDA to $322 million, and a 25% increase in the interim dividend declared to $0.075 per share fully franked, and of course, the maintenance of a strong balance sheet after the corporate activity during the half year, with $274 million of cash, bullion and investments on-hand after removing the purchase consideration for KCGM. Slide 8 provides a graphical illustration of the business value creation since June 2010. Northern Star has created over $9 billion of value over this time frame through operational excellence, investing heavily into exploration, growing production, optimizing assets and financially disciplined inorganic growth, all of which have generated superior returns for our shareholders. These returns are best illustrated on the next slide, Slide 9, with the 2 charts demonstrating the consistent financial returns generated by Northern Star, delivering an annualized 17% return on equity for the December half year, which, when taking into consideration the equity raised late in the period for KCGM, rises to 23%. The execution of the company's strategy over the past 5 years has resulted in a consistent financial performance with an average annual return on equity of 29% and an average annual return on invested capital of 28%. And as illustrated, both of these investment metrics delivered by Northern Star compared very favorably to the broader GDX index over this time frame. Moving to Slide 11, which highlights the generation of $297 million in group operating cash flow, an increase of 76% from the previous corresponding period. Jundee and Kalgoorlie operations continue to deliver strong EBITDA margins of 64% and 41%, respectively, with Pogo making an 8% EBITDA margin during the December half. Whilst Pogo continues to contribute positive EBITDA, we highlighted during the recent December quarter call that the operation is forecast to enjoy a much stronger second half of the year, and we expect a significant increase in contribution to both group earnings and cash flow. Slide 13 highlights the significant increase in underlying free cash flow generated during the December half whilst maintaining organic growth investment through expansionary capital projects and our extensive exploration programs. This investment includes the process plant expansions at both Jundee and Pogo, development and associated infrastructure at both Pogo and Moonbeam underground, along with our exploration focus at Kanowna, South Kalgoorlie and our exciting Goodpaster Project at Pogo, all of which will drive further future production and returns to our shareholders. The waterfall chart on Slide 14 illustrates the movement in cash, bullion and investments for the December half and the generation of $116 million underlying free cash flow. Most prominent is the addition of earnings and cash flow growth from the 2 acquisitions transacted during the December half, with funding preparation executed for the acquisition of 50% of KCGM, which completed 3rd January, and the takeover of Echo Resources Limited, which completed on the 6th of December. The chart on Slide 16 highlights the financial strength of Northern Star with approximately $474 million of funds available at 31 December from the accumulation of cash together with other sources of liquidity. With the preparation for the acquisition of the 50% of KCGM, bank debt, excluding equipment finance, was $500 million at 31 December, with gearing levels remaining modest at approximately 16% on a net debt-to-equity basis. Even after the recent corporate activity, the company continues to maintain a strong balance sheet, enabling the strategic flexibility to pursue and maintain superior returns from the organic growth opportunities within our broad portfolio of operations. Thank you. I will now hand over to the moderator for questions.

[Operator Instructions] Your first question comes from Sophie Spartalis from BofA.

Just a few quick ones from me for Ryan, if I may. Firstly, in terms of the tax for FY '20, the effective tax rate, I see that you've got 16% effective tax rate in 1 half '20. Is that expected to average 30% for the year? Can you just maybe run through that for me, please?

Yes, Sophie. Yes. Look, good pickup. So it won't. It'll increase in the second half. I'd expect the second half to be -- effective tax rate around that 30%, probably a little bit higher. Just to step you through it, so when we acquired Echo, it had tax losses. And so we've picked those up. And so that's why -- they had, what, $72 million in tax losses, so that's why you see a slightly lower effective tax rate for this half. Second half definitely would be up around that 30%, just over 31%, with Pogo contributing to earnings in the second half. So I would expect that.

Okay, great. And then in terms of depreciation for FY '20, are you willing to provide a range for that?

Look, I think we provide on an ounce basis in the quarterlies. I think what you see in the half year will be what the second half will be like, subject to, obviously, ounces because we provide on a per-ounce basis. So no real change to this -- to the first half, Sophie.

Okay. And then just a final one from me. Just in terms of the employee benefit expenses of $147 million, give or take, in the half, significantly up from a year ago. Is this a long-term rate that we should be looking at? Because I saw that you've got a positive swing in the second half '19. So do we expect that again in second half '20? If you can provide some guidance around sort of a suitable number for that, please?

Yes. Look, again, probably similar in the half. The reason why there's such a move, a couple of things. One is, remember, 2018 only had one quarter of Pogo because we completed essentially at the start of the second quarter. So that's one reason. The other two reasons is because we have taken -- or we've gone from a contractor model at Pogo and South Kalgoorlie to basically an owner-operated model. So that's why you see basically the expenses increasing on the employee side, but you see mining expenses reduced effectively. So I would take the first half as a guide to the second half.

[Operator Instructions] Your next question comes from Daniel Morgan from UBS.

Just a few questions. So firstly, if I refer you to Slide 5 of your presentation. It appears that you're flagging that Kalgoorlie operations and the Super Pit are going to be combined in your reporting structure going forward, so is KCGM to be incorporated into broader Kalgoorlie ops.

No.