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

Thank you for standing by, and welcome to the Northern Star FY '21 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Stuart Tonkin, Managing Director. Please go ahead.

Good morning, and thanks for joining the Northern Star Full Year Financial Results Presentation. With me on the call today is Chief Financial Officer, Morgan Ball. I would like to start by emphasizing what a pivotal year it has been for Northern Star. We have emerged from a period of significant M&A activity with an exceptional asset portfolio, which will drive sector-leading growth and financial returns. In simple terms, we have the gold inventory, which will underpin the growth outlined in our recent 5-year strategy. Our focus is now on unlocking the full value of that inventory in a way which maximizes shareholder returns. This organic growth will be generated by a simplified business, utilizing the synergies of the consolidated Kalgoorlie and Yandal regions and delivery of the Pogo growth strategy. Today's results contain numerous accounting adjustments associated with the merger. But we have sought to simplify our metric of success into one key measure of cash earnings, which are a record $648 million. This impressive result includes the Saracen assets from the 12th of February and was achieved at gold price of $2,277 an ounce. So with current spot price, more than $200 an ounce above this, we are positioned well to generate cash. We emphasize in our strategy that Northern Star is a business first, and there is no better demonstration of business health than cash generation. We believe that cash earnings provides a transparent and meaningful view of our business performance, both for the past year and into the future. We have a demonstrated history of profitable organic growth and have a clear pathway to build from our current 1.6 million ounces per annum to 2 million ounces per annum over the next 5 years. We continue to invest in exploration at our world-class assets and grow gold reserves on a per share basis. And now with KCGM under single ownership, this Tier 1 asset will provide significant contribution to further reserve growth. We also have a track record of paying consistent dividends for the past 10 years. And today, we announced a new dividend policy that delivers an increased final dividend of $0.095 per share, taking the full year payout to $0.19 per share fully franked. Our policy of active portfolio management, as demonstrated by the recent sale of our Kundana assets for $400 million is part of our commitment to maximizing our returns on invested capital. I extend my thanks to the Kundana team for their significant contribution to Northern Star and in supporting a smooth transition of business to Evolution Mining. Finally, with the backdrop of sector buoyancy and labor and materials cost pressures, we have a highly capable operating team to drive productivity and deliver merger synergies to lower our all-in costs as we grow. I encourage you to take the time to review our annual report and financial results and discover the significant platform we have established to deliver sustainable shareholder returns. I would now like to pass to Morgan to discuss the financial highlights.

Thanks, Stu, and good morning to all. I will be referring to some of the slides in our presentation that was released on the ASX platform earlier this morning. Stu has already said it, but it bears repeating, FY '21 was a transformational year for Northern Star, both corporately with the Saracen merger and financially with record production, cash flow and profits. From a statutory account perspective, FY '21 was unique, given the accounting requirements in relation to the merger, which became effective from 12th of February. Whilst this year's statutory earnings have been impacted by the merger accounting, our ASX releases this morning highlight the key elements of the company's underlying performance both for FY '21 and on a going-forward basis. I now refer you to Slide 5 of the presentation, which sets out the key financial highlights. As you can see, Northern Star has once again achieved improved year-on-year financial performance in a number of key areas, namely: record revenue of $2.8 billion, a 47% increase in our underlying EBITDA to $1.2 billion. Record cash earnings of $648 million and a record underlying NPAT of $372 million, which is a 28% increase year-on-year. It's also pleasing to note that despite the challenges posed by COVID and the inflationary environment that we are in, we have been able to make good control over our costs as reflected in the increase in our EBITDA margin. On Slide 7, we've set out the company's cash earnings for the financial year. Given that there will be an ongoing noncash impact on the company's statutory earnings from the merger accounting adjustments, cash earnings provides a clear measure of the underlying quality of the financial performance of the business. The concept of cash earnings shows the amount of underlying earnings after claims external to Northern Star, which is available for return to shareholders, growth-related investment and balance sheet management. In relation to FY '21, as you can see, we have removed specific items from our EBITDA of $2.3 billion to arrive at an underlying EBITDA of $1.2 billion. Then in line with our definition of cash earnings, we have subtracted sustaining capital of $356 million and interest and tax paid of $155 million to arrive at our FY '21 figure of $648 million. Turning to Slide 8. As you heard from Stu, the Board has reached the decision to update the company's dividend policy from a percentage of revenue approach to a percentage of cash earnings. Under the updated policy, the company will target an annual dividend payment in the range of 20% to 30% of these cash earnings. The final dividend for the year of $0.095 per share reflects approximately 31% of the cash earnings for the half. Whilst this is slightly above the top end of the range, the Board was cognizant that the Saracen-related earnings were only included 4 months of this period. By way of comparison, this dividend equates to 6.7% of revenue, above the previous policy levels which targeted 6% of revenue. This dividend will take the total dividend payout for the financial year to $0.19 per share or $221 million, which out of interest, is 8% of our full year revenue. Given the one-off accounting changes during the year, Slide 9 reconciles the company's statutory NPAT of $1 billion to our underlying NPAT of $372 million. As you can see on the slide, a primary driver of the statutory in that amount is the fair value revaluation of Northern Star's existing 50% interest in KCGM. This interest was required to be revalued upon completion of the merger as a result of the company obtaining 100% control of this asset. This is accounted for by an increase in net assets on our balance sheet with a corresponding pretax gain of $1.9 billion booked to the profit and loss, along with the corresponding noncash deferred tax expense. On Slide 10, we have summarized the major out of the ordinary items impacting this year's accounts. These include the fair value uplift in the Saracen assets and Northern Star existing 50% share of KCGM and also the impairment of the historical low-grade stockpiles at KCGM. Given the investment and operational progress we have made at KCGM, we have seen a material decrease in the expected depletion of the historical stockpiles at the operation. Without any medium to long-term plans to process this contained metal, we've taken the conservative view to write the accounting value down to 0 at June 30. You will recognize Slide 11 from our strategic plan presentation released in July. We have established key financial parameters that will support the company's growth strategy going forward, whilst maintaining a strong balance sheet and the ability to provide sustainable returns to shareholders. Following the recent sale of the Kundana assets to Evolution, we reduced our corporate bank debt from $662 million at June to $262 million. Our strong net cash position and the liquidity available for our balance sheet as the company is well placed to execute on its growth plans to lift annual production to 2 million ounces per annum. Finally, I would like to personally thank the Northern Star financial, commercial and legal teams as well as our auditor, Deloitte. This has been one of the more interesting year ends that I've been through, purely due to the number of moving parts. Both the NST team and Deloitte have gone the extra yard to pull this all together against the timetable in what I believe is a transparent and professional manner. On that note, I'll pass you back to Zoe for our Q&A. Thank you.

[Operator Instructions] Your first question comes from Sophie Spartalis with Bank of America.

Just a few questions from me, if I can. On the front page of the results release, you talk around having a clear pathway to 2 million ounces, but you also talk around this profitable growth returns and actively managing the portfolio. Can you elaborate on this further? And I guess, just guide us as to what we should be looking for going forward, please?

Thanks, Sophie. So I think the best material, again, this is the financial results focused, but in our strategy, presentations and obviously the biggest presentation, selling that 5-year pathway to 2 million ounces, and that's without the Kundana assets contribution. Largely, that is your Yandal growing from sort of the 450,000 up to 600,000 ounces is growing, Pogo from 200,000 to 300,000 and moving all the Kalgoorlie region are primarily from KCGM, but the sum of the parts there, 900,000 that takes us up to the 2 million ounces by FY '26. Importantly in that, the capital is being spent for the next 3 years. Every year, this year, net capital is $570 million, steps down to $425 million and again, down in '24. So once that capital spend, the all-in costs reduced as the capital washes off and the all-in sustaining costs improve on that economy of scale, particularly in the Yandal. So they are the key highlights. Everything is in our control. We've got the team, we've got the assets. It's around now the execution part to deliver that organic growth over the next early few years of that 5-year strategy.

And then just in terms of that, you've got the team, you've got the assets, I guess you also need the bonds on seat. Can you just talk around of that growth capital amount, how much is protected and how much is variable in terms of open to movement given those industry pressures?

Look, we probably look at the near-term stuff. A lot of it is moving waste at KCGM. There's a lot of capital pre-strip on the southern cutback of Fimiston and the OBH to the north. So that is around material movements and it is -- seats in trucks. Look, that's a challenge, and we've encouraged and put in promotional things to get people to Kalgoorlie and get those jobs filled. The other part is the engineering at TBO, and we've got that contracted there with GR Engineering Services, a $100 million contractor and have started handing that over for them to start that commencement of the mill expansion from 3 million to 6 million tonnes. So that work is contracted and underway. Look, labor pressure for the sector exists. There's probably 140,000 resource jobs for 120,000 people in the state. So without borders, that's a void of absolute production activity. But we have a lot of the people in our team and in control, and we prioritize where we put those people to ensure we deliver our guidance. So that's -- there's flex in our plans, but that's in our control presently.

Okay. And then also part of that question, that initial question that I asked in terms of actively managing the portfolio. Can you just talk around where Paulsens sits in the portfolio and more broadly other assets that aren't in your growth outlook today where that priority lies?

Yes, for sure. So when we say active portfolio management, we say we can operate 3 to 5 production centers. We've obviously got 3 presently. And we're saying this sort of 1.8 million to 2.2 million ounces. So you can flex up and down in how many of those assets. The divestment of Kundana means that we can reapply capital into our business and reapply skills and special team skills in Kalgoorlie for greater returns. The Paulsens is not a production asset, again, and not core at the moment, but it's still on care and maintenance and able to be turned on. And then the other important asset, obviously, the Tanami. We've sold for a joint venture recap there with Tanami Gold and putting together the team to go forward on a 50-50 basis there that shareholders have result on. So there's still plenty of pipeline, and it's important to have projects all the way up the pipeline from your greenfield development all the way through to your production. And you'll see that again in our strategy highlighted in my earlier slides showing that we've got all of those things in there. So it's more around those that are in production. We've got the 3 key production centers in Kalgoorlie, Yandal and Pogo to deliver that 2 million ounces.

Okay. So that's awesome. Just 1 final question for Morgan. Just in terms of the write-down of the low-grade stockpiles at KCGM, just given there was no near-term plan to process these materials. Can you just talk through that a little bit further, please?

Sure, Sophie. As you would have seen, again, in the strategy, we are based on our actual in-pit mining. We actually are realizing a lot more tonnes and ounces than we initially forecast as we've taken on this asset. Given that, as you'd be aware, there's the -- what we term the marginal stockpile is there and that sort of runs at above the ground. And then there's what's called this low-grade stockpile of almost mineralized waste, it sits at about 0.65 grams. That's been there historically with the previous zone have never been touched. Eventually, at some stage, we may put it through the mill, but that's so far out based on inventory accounting, it was appropriate that we write that stockpile only off for the year.

Your next question comes from Daniel Morgan with Barrenjoey.

I refer to CapEx guidance specifically on Page 13. Here, it appears that CapEx is for the upcoming year, $682 million gross, $570 million net, which compares to the $570 million announced back at the Strategy Day. I just want to understand this a bit more. And there's also a footnote there that suggests the accounting standard change in FY '23. So this isn't going forward. Can guys confirm the Strategy Day guidance of FY '23 and FY '24 of $425 million and $380 million, respectively, is therefore both gross and net?

You sound like an accountant, Dan, you're exactly right. That's the case. So obviously, under accounting standards, we are required to reduce the capital investment in growth assets by gold that happens to be realized while we're in pre-commercial. That changes at the end of this financial year. So those numbers in the Strategy Day, our like-for-like in that regard, we've taken the net number out. We've shown you a net number of gold received this year. Going forward after this year, that's the growth number we'll spend on the capital and the goal will get to P&L.

All right. And could you finalize...

Dan, $570 million is the net number. And then in FY '23, $425 million is the same. Gross -- it's a gross number. $380 in FY '24 is a gross number because the accounting standards change.

Okay. That's important to know. And which assets are these development receipts going to be at? And can you tell us the expected ounces and the price assumption you've used there because obviously the price assumption might be different?

Yes. I think we've actually got a note around the price assumption in the Word release, Dan, you wouldn't have had a chance to read that yet. Obviously, that could change depending on our hedge book and the spot price, but it's roughly 50,000 ounces forecast at approximately $2,240, $2,250 . It's predominantly out of Thunderbox underground, which will click into commercial production during the course of this year and Thunderbox C-zone, the C-zone pit. And then as Stu mentioned, we're still moving a lot of precommercial dirt at KCGM. So there's a bit coming out of there as well. So the benefit with that is you see us in KCGM, we were getting over 30% of the ounces from the same material in those pre-strips. That's an additional credit and a spot being higher than that assumed price. It's actually netting off -- significantly netting off the benefit of your CapEx.

Yes. And last question is on the dividend. So you've changed the dividend policy and now focusing on cash earnings, which take into account sustaining CapEx but not growth CapEx. Can you just talk about how you came up with the dividend policy and why you haven't done, say, overall free cash flow, for instance?

Yes. Thanks, Daniel. So look, many things were considered and discussed in all the scenarios. I think the percentage of revenue has served us well over the journey, while we've organically grown and invested capital to grow over the recent years, and it's worked well almost as a proxy royalty to shareholders in that regard to percentage of revenue. On a go-forward basis, the capital in the next few years, once that is spent, we're at that run rate of that 2 million ounces. It is all around the cash generation out of that portfolio and the return to shareholders on that balanced capital management. So what the difficulty and you'll see this in these presentations in regard to merger accounting, your traditional metrics, NPAT, EBITDA kind of get destroyed with that merger accounting assumptions in there. So we've adjusted a non-GAAP measure, which is cash earnings, you will get a definition there highlighted. But we believe historically for the year and go forward, it is the best representation of business health in cash generation and therefore, 20% to 30% of that cash generation between the shareholders is a great opportunity for return on dividend and it also is higher than the previous policy.

And I guess, Dan, the one thing I'd add. As opposed to free cash flow, which some of our peers do, we do have good capital growth options in the business, but we think the business underlying that can handle a good, strong, consistent dividend return to shareholders. So we didn't want to penalize the dividend by removing free cash flow before we calculated the dividend. And we do see that growth capital tailing off. So it makes really good sense for our business.

Your next question comes from Nick Evans with The Australian.

Look, I noted what you've sort of said in response to the labor stuff a little earlier on. I just wondered sort of what impact that's having on Pogo. You sort of -- just had a quick look through the annual report and you said that the lack of labor mobility between Australia and the U.S. was a bit of a problem. But are you seeing sort of similar kind of skills issues within the U.S. sort of mining labor market? Or is it pretty much restrained to Australia at the moment?

Yes, good question. Look, we see the availability of the labor in the U.S. And remembering probably half of the team at Pogo, Alaskan residents and half come up from lower 48 states. We are reliant on some expat specialist skills moving from Australia to Alaska, which is the real constraint at the moment. And we're only talking about 5s and 10s. We're not talking about hundreds and thousands. So the difficulty of moving labor in and out of Australia is challenging for the business at Pogo. But our team, we absolutely appreciate. They're managing through that [indiscernible] et cetera. And it doesn't appear to be that same lockdown scenario in the U.S., you've got a lot more ability to transport labor.

[Operator Instructions] Your next question comes from Mitch Ryan with Jefferies.