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

Thank you for standing by, and welcome to the Northern Star Half Year FY '22 Financial Results. [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 our FY '22 Half 1 Financial Results Presentation. With me on the call is Chief Financial Officer, Ryan Gurner; and Chief Operating Officer, Simon Jessop. We have delivered a strong financial performance year-to-date with record cash earnings of $430 million for the 6 months, bolstering our net cash balance and providing ability to fund our organic growth plans, our exploration success and dividend growth, all demonstrating continued strong returns to shareholders. We declared an increased interim dividend of $0.10 per share fully franked, reflecting continued disciplined management across capital allocation options. As presented at our quarterly, our 3 operating centers at Kalgoorlie, Yandal and Pogo are all in a growth phase to produce 2 million ounces per annum by FY '26 whilst driving down costs through merger synergies and production efficiencies. Our strategy is progressing well with an outlook of a stronger second half of FY '22 to deliver full year guidance of 1.55 million to 1.65 million ounces at an all-in sustaining cost of AUD 14.75 to AUD 15.75 an ounce. We continue to operate our company to the highest standards with improved safety and continued investment in our communities and the environment. We will be publishing a sustainability report next week, highlighting the company's achievements over 2021. In relation to COVID, we have utilized our Alaskan experience to prepare our Australian operations to mitigate the impacts of COVID as we see Western Australian caseloads rise. I would now like to hand to Ryan to present the financials.

Great. Thanks, Stu. Good morning, all. It gives me great pleasure to present to you our financial results for the first half of 2022. I'll be referring to some of the slides in our presentation released this morning. So I'd like to start you on Slide 6, which provides an overview of the key financial highlights achieved during the first half of FY '22, with a statutory profit after tax of $261 million and an underlying net profit after tax of $108 million. EBITDA -- sorry, underlying EBITDA of $699 million, which is up 47% from half 1 of FY '20. The assets performed well this half with $622 million of operating cash flow generated, which was up 46% from the prior half. The company generated record half yearly cash earnings of $430 million, and we remain well positioned to deliver on our near-term low capital intensity organic growth profile with our strong balance sheet, which includes $588 million in cash and bullion at 31 December. Over the page to Slide 7, which outlines a reconciliation of underlying net profit after tax from half 1 FY '21 through half 1 FY '22 and then to statutory net profit after tax. The company achieved underlying net profit after tax of $108 million. Consistent with expectations, noncash inventory charges and D&A were both higher. These increases are due to the significant increase in asset values resulting from the required major accounting. Underlying net profit after tax, as presented, has not been adjusted upwards to the impact of these items. These noncash charges were offset by an increase of $290 million of pretax profit in the current half from the higher production levels. When we reconciled the statutory profit, the main add backs include the $242 million pretax gain on the sale of Kundana, which completed during the half, an $18 million noncash gain on the required fair value remeasurement of the debenture with Osisko Mining, a $19 million charge to the income statement upon purchase of the power business from Newmont, which represents the extinguishment of the power contract between KCGM and the newly acquired business and a noncash exploration impairment of $12 million. The result is a statutory net profit after tax of $261 million. The effective tax rate for the half was 34%. This was slightly higher than expected due to the charge for extinguishment of the power contract between KCGM and the power business previously mentioned. Over the page to Slide 8, which highlights the company's $430 million of cash earnings. Cash earnings represents the amount of underlying earnings, which is available to shareholders, growth-related investments and balance sheet management. In relation to the first half, as you can see, we have removed the gain recognized on the sale of Kundana and other noncash items for an EBITDA of $926 million to arrive at underlying EBITDA of $699 million. In line with our definition of cash earnings, we have subtracted sustaining capital of $205 million and net interest and tax paid of $64 million to arrive at our first half cash earnings of $430 million. Over the page to Slide 9. This slide highlights the key cash flow movements during the period. The company recorded group operating cash flow of $626 million during the half, driven by the larger business post merger. This operating cash flow included $59 million of taxes paid during the half year. Post period end, the company has received $163 million in tax refunds in respect to FY '21's corporate tax return. As a result of the merger and based on our current forecast and assumptions, we are anticipating minimal corporate taxes over the next 12 to 18 months from the Australian operations. At the halfway mark of FY '22, our organic growth projects remain on track, returned $40 million invested. This is net of the $58 million in gold revenue received from preproduction sales at Thunderbox, D Zone and underground and KCGM, which has offset the development cost during this phase. Northern Star's total guided capital growth -- growth capital is $570 million for FY '22. The $127 of net investment cash inflow during the half predominantly comprised of 3 transactions: these were the sale of the Kundana assets of $402 million; purchase of power business from Newmont for USD 70 million, which provides infrastructure and power security to support the requirements of KCGM, including any potential mill expansion, lower power costs and provides further options to Northern Star to implement renewable energy solutions; and a convertible funding agreement with Osisko Mining for CAD 154 million. The company has paid back $360 million in corporate bank debt and delivered $107 million in fully franked dividends in the past 6 months. At 31 December, the company retained $520 million in cash. As illustrated over the page to Slide 10, the company continues its demonstrated history of returning funds to shareholders by today announcing an interim fully franked dividend of $0.10 per share, which will total $116 million paid to shareholders and represents a 27% payout of cash earnings. The record date set to the interim dividend is 8th of March and payment date 29 March. And finally, as illustrated by Slide 11, our balance sheet remains in great shape and supports our growth strategy. At 31 December, we have $1.3 billion in liquidity, with cash and bullion of $588 million and access to $700 million in undrawn bank facilities. We remain net cash with corporate bank debt of $300 million at 31 December, and we maintain a sensible approach to risk management with 20% of the next 3 years' production hedged above $2,400 per ounce. I'll just hand back to Stu to touch on a few of the remaining key slides in the presentation.

Thanks, Ryan. So on Slide 13, we maintain our growth in the second half to meet our full year guidance, with increased grades of Jundee and increasing mining rates at Pogo. Our key capital projects at Thunderbox mill expansion and the KCGM fleet upgrade and mining volumes increase are progressing well. Our continued exploration investment will be reflected in the March end resource-reserve update published in the June quarter. On Slide 14, it reminds us of the high-quality organic growth strategy to lift production to 2 million ounces per annum whilst lowering costs, driving increased cash flow generation, which is the reward for the investment and the effort in the near term. Slide 15 highlights how close the growth projects at Thunderbox and Pogo convert to cash flow and strong investor returns, and the significant opportunity that exists to KCGM to grow through the next 4 years and evaluate expansion opportunities, including the mill -- the Fimiston mill study, leveraging this Tier 1 asset. So now I'd like to pass to the moderator for questions for the time.

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

Just wondering if you could please provide an update with regards to negotiations with the Osisko on windfall and specifically in light of the announcement that they made yesterday with regards to the high-grade component of that bulk sample.

Yes. And so we're still active in negotiations. We've had a due diligence team on site, and we still got the next number of weeks to get to complete that due diligence work. So I guess I won't give any further detail on what that process is, but both teams are working very well, providing good information and working together. And as you can see there, renewed resource update and the additional drilling that just shows quality of that windfall system. So again, this is the reason why the asset sits on strategy with Northern Star and while we're interested, but still a lot of water to go under the bridge in regard to whether we can get to a partnership agreement. And remembering Northern Star is very disciplined in our outlook on investments and the returns we expect from those. So we still got this rest of this month to play out.

The next question is from Levi Spry from UBS.

Thanks for the call. So I missed some of that. I was just after I think it was an Osisko question, but -- so I caught that. But just in terms of the KCGM mill expansion studies, can you just talk us through what we're going to see and maybe where that's up to?

Yes. Thanks, Levi. Yes, look, we're progressing very well on the KCGM mill expansion study. And we've highlighted a few options there that we're running to ground previously, and it's about simplification of that circuit. So at this stage, we're on track for an update by the end of FY '22. And yes, we're tracking very well on the mill expansion study. So it's all around trying to increase uptime and take advantage of the resource and the reserves we have at that significant asset, at the same time, lowering unit costs. So yes, we're on track for an update in this quarter -- next quarter, sorry.

Yes. And -- but just in terms of what's happening over there. Obviously, we're faraway from it here. But just in terms of capacity and things like that, can you give us any sort of insight into how that might impact things?

Yes. So again, it's Stuart. So look, the financial metrics around an expansion, say, target of 23 million tonnes are very sound. But to your point, it gets to the ability to execute that. So it's a different level after we've done the math and done the evaluation of those return metrics. It's really getting a team to build it in WA at the moment. We're doing a fantastic job at the Thunderbox expansion at the moment. I was up there this week. And you can see the progress the crew is making despite any of those sort of normal disruptions around freight materials and labor. They're doing a sensational job up there, advancing the PPO expansion. So that's a good near-term lesson we're getting in relation to our future thinking and planning around Fimiston.

[Operator Instructions] The next question is from Matt Greene from Credit Suisse.

Just quickly on the post-merger synergies. You've realized $40 million to date of some of the procurement and contract savings. Is this in line with your expectations? And just given some of the broader challenges, have you seen some of these synergies unwind? Or do you still sort of remain on track in delivering some of these targets over the medium term?

Yes. Thanks for the question, Matt. Look, short answer is yes. So we sort of -- we put that note down there. So we've done a lot of work, particularly at KCGM and Kalgoorlie around consolidating consumable supply agreements, hire agreements, diesel and lubricants, unit power costs, things like that. But with our scale, we're able to achieve. Obviously I mentioned around the tax refund that the corporate, I guess, synergies are probably more than half the value there. So they're certainly in hand and very well known and understood. And additionally, from a corporate perspective, I think the synergies, I guess, are probably coming corporately more now and then into the future. They're probably a bit of a slowdown in the corporate where you've got 2 companies running off some fixed costs and then ultimately, some of those fixed costs fall away in the short term. That's still there, but the sort of medium and long-term obviously fall away. So we're experiencing that now. So look, we're making good progress on the contract synergies from the scale of the business.

That's great. And I guess just moving on Pogo. Stu, you mentioned that December quarterly that with the WA border reopening that you're looking to send some expats and jumbo operators over for the second half, just given that's the uncertainty around the border there. Do you still -- I mean are you still able to do this? And whilst we're only a month into the second half, I mean, it seems like you still remain confident that you can achieve those production rates at Pogo. You exited the quarter pretty strongly. Have you been able to maintain that into the month of January?

Yes. So look, as pointed out and highlighted on the quarterly, it's dependent on us getting the development leaders in place to open up those new production fronts and meet the mining rates to feed the mill that's already expanded. So that's our view on the second half and getting the staff and the equipment that's there now. It's been much easier, obviously, with the borders relaxing. I guess I'm heading to Pogo on Monday myself. So those are the opportunities to get there and see it first hand, and so we have teams managing through all that. So yes, it's still very dependent on month in, month out, building out 1,500 meters a month, opening up as new state and fronts, building mining volumes. And that's where we -- our view of the second half being stronger on the exit rate of FY '22 setting us up well for FY '23.

Okay. And then just I guess to follow on the KCGM mill expansion. Just to be clear, you're only looking at the 2.9 million ounce in low-grade stockpiles. The marginal stockpile that you wrote down last year, are you contemplating evaluating that, particularly, I guess, if you look at a larger size mill there? Or is that out of the question? Now it's just purely just low-grade stockpiles there.

Look, there's a number of things that feed into it. So what we're trying to maximize is primary ore into that plant, and then supplement with the stockpiles in there. So you're right in saying there's nearly 3 million ounces sitting on stockpile. So 120-plus million tonnes without taking that lower -- the subgrade material that was written down. We're really working hard to get the volumes out of the OBH cutback back down into the Golden Pike high grade, Fimiston South, in the next sort of 4, 5 years, really contributing. But another important one is the expansion of Mount Charlotte underground feed from that. So we didn't have any Fimiston underground planned in the near 5 years. So expanding the better grade material comes from Mount Charlotte will also help contribute to the total ounce profile. So yes, an expanded mill is really, as Simon highlighted, it's getting the unit costs down as low as we can on a very simplified layer. And that drives a lot of the financial metrics across the whole business because every tonne that's put through there. And the other important input is power, and we've already seen a significant saving on the power on the back of integrating the Newmont power business. We're nearly half the power cost than what we'll effectively being charged on the previous part of that setup. So you're really seeing the benefits and the scale coming to play at KCGM.

That's great. And just one last one for me. On a -- it's bit of an accounting question. Just that 96 -- and apologies if you did mention, if I missed this earlier, but that $96 million in noncash inventory movements, is that all at KCGM?

Yes. Matt, that's right. The majority is KCGM. Yes, correct.

The next question comes from Peter O'Connor from Shaw and Partners.

Firstly, Stu, just a clarification about Osisko DBD, when do we expect to hear the next announcement from you regarding what you're doing in terms of that deal?

Yes. So we've been completing due diligence for 3 months until the end of February. And so just throughout the back into February into March, we'll be talking mostly on those points. So again, I don't want anybody to conclude it goes one way or the other, just reinforce we've done thorough work. We're disciplined in our investment thesis. And we'll evaluate that time and my travel will incorporate that from Alaska across to Windfall.

So again, March quarter, do we expect some announcement either way? Or is that 2 type?

It's likely an update in March quarter -- sorry, in the -- by the end of the year in March quarter, during March.

Okay. Great. Next one, Stu, you talked about with the mill studies, and you talked about the pressures there in WA. And it's been on calls lately with other peer companies, just that pressures manifest in particularly one case where a potential development may be deferred. Is that a similar situation to your end of your project not big enough to the problem due to labor availability, et cetera?

Yes. So I reinforce that, that Fimiston study, our current growth plans to grow the 2 million ounces per annum reducing costs does not require and doesn't have the capital associated with that mill expansion. It's purely looking at that from an extra over opportunity. And it also doesn't include an underground contribution from Fimiston, which has 4 million ounces of inferred material to grant it. So it's important to note that it's not going to change our course of our strategy, and we'll evaluate the merit of being able to do it. And as you recognize, as many are, if you're building anything at the moment in WA, it would come under either labor pressure or cost pressure and just execution risk. So all those things get considered. This is an investment decision to be met post -- again the financials method.

So acknowledging your discipline in that regard, is that -- I know it's an additive project or part of the 2 million. Is it that tight in WA that you would look to defer if that -- is that a part of your decision tree that if it's related to total CapEx, the pressure is too high? Is that how tight it is over there?

There's a few things to play and the border relaxing will assist in that. So it would still be a multiyear build, so it could be managed well. But you'd want to see those commitments from those contractors that their order book and their workload wouldn't compete with that. So on a large-scale project, and I imagine the iron ore players do the same with consideration to what else is happening across the sector and what's with contingency should you have issues, majority is just for staff and/or price escalation in that regard. So you put all your protections into your contracts. But if you literally cannot get people, that relates to deferrals. So the beauty about this in that Thunderbox is a great example on a small scale. We still are running a 3 million tonne per annum plant profitably and the mine is performing well. The tie-in is very, very short. You need to tie in and do the downtime to do that. And in parallel, we're building an additional 3 million tonne capacity that will turn it into that 6 million tonne per annum. So you're not sitting in the J-curve being delayed and deferred and out of cash flow. You're able to do it in parallel and our thinking in Fimiston goes to the same thing. You're not shutting off for a long period. You're continuing to maintain your 13 million tonnes baseload, and you're looking at the upscale project to ultimately -- and you're at a much lower unit cost at a much simplified format.

And Stu, to the COVID issue, given your experience that you mentioned in Pogo and just with the situation presented in [ finance ] over the next months and weeks, how do you see this play out? When does McGowan open the borders? How do we think that works? And your experience in how COVID spreads in Pogo, plans, thoughts, expectations of how this quarter, next quarter looking at regard with labor, absenteeism, et cetera?

Yes. So I don't know any more than anyone else in regard to the Premier's thoughts on borders, but I expect that as these relaxations occur, they don't get reversed. And we've already seen compromise on the isolation period going from 14 to 7, which makes a major structural difference to us in our planning. And that was one of the key things at Pogo that allowed us to keep things moving, moving that to 5 days for positive cases and 2 days for close contact with a lot of controls that happened beyond with isolation and masks and testing to manage that. But there were 2 things that the actual health risk and sickness downtime, but then there's the structural downtime created by these isolation periods, and that was what was really penalizing Western Australia. So the fact that, that has changed, that's really key. And then within a month or 2, you will see, I imagine, both more freedom between borders in the state and international because it will be prevalent in the community and manage well. And remembering the resource sector, we are 100% vaccinated at operations. We're testing everybody going through the mine gate to mitigate importing the pandemic to the site and the -- we're limiting contacts and number of people in groups such that do we have a positive case, we're just limiting the amount of people that, that dominoes and effect. So they're the learnings and lessons we've taken from Pogo. And we're still managing through that at Pogo and limiting the impact of the same. So yes, it's still -- there's still a lot of unknowns in Western Australia, but I've seen a lot of planning from the sector and the mitigation actions are well placed to deal with those challenges.

The next question comes from Daniel Morgan from Barrenjoey.

Just on your guidance, obviously, a better second half of FY '22 as anticipated in the first half. I was wondering if you could just go around the grounds of each of your assets and just highlight what are the levers or things driving the better performance in the second half at each of the assets.

Yes. Look, I'll start with Pogo because that's the one that's a bit further out in the field, and it's really those mining volumes in grade. And we see that in the current plans of the stope sources and the development ore that's going into the mill. The mill has been performing. When it gets ore, it's performing well and is able to achieve those throughput rates. It's just really about stabilizing that consistent feed to the plant to stabilize recoveries and stabilize that throughput because the ramping up and down just takes time on both sides of that. So it's still a bit hand to mouth at the moment. So the key thing for Pogo is you've got a very large fixed cost element there as a proportion. So it's really -- the all-in sustaining cost there is really driven by the denominator. Look, when we go to the other operations in Yandal Belt, obviously, Thunderbox is a very steady state, and Ryan spoke to D Zone, it's progressing well. The underground is still ramping up, its contribution to mill feed from the Thunderbox underground, and we're trying to get that up to -- beyond 2 million tonnes per annum. So it's on that ramp up month in, month out. The grade up at Jundee, we've obviously got the Julius to keep supplementing that feed as well, and we've commenced in developing the remain underground at the moment as well. So that's more a grade-driven. The volumes are the same, but it's more a grade-driven improvement across the second half of Jundee. Kalgoorlie, most of the South Kal and Kanowna operations are going well, albeit Kanowna picks up some better growth from the A blocks down the bottom of the mine. But primarily, it's around the Fimiston primary ore being managed from what we can get out of the Golden Pike in the South as well as just the sequence of where the cycle is through the OBH and the Fimiston Morrison cutback. So it's still volume-driven displacing lower grade stockpile material at the KCGM. And again, we're seeing it performing really well, and that's also driving down the unit cost at KCGM. And the power saving alone, we're seeing that convert through into the low-end unit costs, which has helped the group saw the sustaining costs get back in line with guidance.

And next question just on the power business, which you've just acquired. Are you a natural owner of that business? Or is it something you might look to divest if somebody's more in the power infrastructure type business and free up some capital?

No, I think it's fundamental. [ Let's say there's ] a few things. It's fundamental to our ability to do decarbonization and emission reduction, utilizing that infrastructure, we can fast track access to wind and solar, work into that network that we have there. So it's key to that. The question around, should I own it or someone else to deliver our capital, it's a very quick payback period from the investment in that so -- before carrying in no time, and it can be brought up and can actually be a profit center, feeding power broad scale outside of Northern Star. So I'm not motivated to consider selling it, and it wouldn't be around the capital rotation there. It's getting great returns, and it absolutely justifies the acquisition of it over the life of the asset in Kalgoorlie. It's still a significant contribution into the economics on the Fimiston upgrade and we have high power cost. And with renewables, we could potentially have it again. It's a huge opportunity to expand margins at Kalgoorlie for us so it's really strong business case.

There are no further questions at this time. I'll now hand back to Mr. Tonkin for closing remarks.

Okay. Thank you, and thanks for joining the team today. It is clear that our strategy is delivering strong returns as demonstrated in our financials and the balance sheet strength published today. I look forward to continuing to update you on our progress. Thank you, and good morning.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.