Northern Star Resources Limited (NESRF) Q3 2023 Earnings Call Transcript

Northern Star Resources Limited (OTCPK:NESRF) Q3 2023 Earnings Conference Call April 26, 2023 7:00 PM ET

Company Participants

Stuart Tonkin - Managing Director

Simon Jessop - COO

Ryan Gurner - CFO

Conference Call Participants

Matt Greene - Credit Suisse

Daniel Morgan - Barrenjoey

Matthew Frydman - MST Financial

Mitch Ryan - Jefferies

Kate McCutcheon - Citi

Operator

Thank you for standing by. And welcome to the Northern Star March 2023 Quarterly Results Call. [Operator Instructions]

I would now like to hand the conference over to Mr. Stuart Tonkin, Managing Director. Please go ahead.

Stuart Tonkin

Good morning, and thanks for joining us today. With me is Chief Operating Officer, Simon Jessop; and Chief Financial Officer, Ryan Gurner. I'm pleased to present our March quarter results today and reaffirm our group production guidance for FY '23.

During the March quarter, we experienced two key milling challenges at KCGM and at Pogo, which delivered a reduced reduction production result of 363,000 ounces of gold sold at an all-in sustaining cost of AUD 1,813 per ounce. We, therefore, revised our FY '23 unit cost guidance to a range of AUD 1,730 to AUD 1,760 an ounce all-in sustaining costs. These operational setbacks are now behind us and we are well positioned for a strong June quarter, advancing our profitable growth strategy to 2 million ounces per annum.

During the quarter, our teams maintained a sector-leading safety performance with an annual LTIFR of one. We are seeing some easing in staff turnover and skill shortages and therefore, with improved retention can stabilize and improve training competency and safety outcomes.

Our decarbonization efforts continued with design and supply contracts advanced for Jundee's wind, solar and battery project. Simon will speak to the Australian operations, but first to our Pogo operations in Alaska.

At the end of the planned mill shutdown in early March, we discovered damage to the ball mill motor, which tripped during the restart. The Pogo team ran multiple action plans and successfully repaired the motor in-situ and we safely resumed gold production in April. So, despite nearly a third of the quarter interrupted, Pogo produced and sold 47,000 ounces and advanced underground projects, including the new underground remote rock breaker and remote loading from Morgans to the underground Grizzly, multiple new development heading takeoffs were established, ore stockpiles were built and diamond drilling continued. It is representative of the endurance of the Alaskan culture as [indiscernible] three weeks ago there, the team remained optimistic and confident on the June quarter outlook and the progress being made towards the growth of 300,000 ounces per annum.

To group finance now, subsequent to the quarter-end, we announced a successful closing of a US$600 million senior guaranteed 10-year notes offering. Our investment-grade ratings reflect the strength and resilience of Northern Star's business. Ryan will talk to the financials shortly, with the March quarter, our best cash flow quarter year-to-date.

The U.S. bond proceeds provide further balance sheet flexibility to fund our organic profitable growth to 2 million ounces per annum, including the optional expansion of KCGM processing plant. Our decision outcome on the Fimiston mill expansion study remains sometime this calendar year and our technical teams continued to receive pricing inputs to the feasibility and assess execution risk mitigations.

Now, over to Simon for the Australian operations.

Simon Jessop

Thank you, Stuart. For the Kalgoorlie production center, including KCGM, Carosue Dam, Kanowna Belle and South Kalgoorlie, we sold 191,000 ounces of gold at an Australian all-in sustaining costs of AUD1,781 an ounce. This production delivered a mine operating cash flow of 69 million, while we spent 112 million on significant growth capital projects, primarily 59 million was spent on KCGM open pit mine development.

KCGM processing volumes were lower than planned due to an extended mill downtime post the major shut in January, which persisted for the majority of the quarter. These maintenance issues were mechanical in nature, also impacting processing stability, leading to a lower throughput per hour. Majority of these issues were rectified by the end of the quarter with a small shut planned in quarter four to rectify outstanding items, ready for the planned increase in open pit ore volumes and grades.

At KCGM, open pit material movement achieved 19.6 million tonnes with shovel availability combined with longer hauls impacting total movement. This is in line with our total annual material movement plan.

Greater than mined ore and volumes were steady quarter-on-quarter, while additional waste was moved in the Fimiston South cutback. The open pit physicals have now delivered 61.1 million tonnes of total material movement in three quarters, which is delivering into our strategic goal of 80 million tonnes per annum of annualized movements.

Underground mining volumes for the Kalgoorlie region was steady at 1.6 million tonnes, while grade increased 13% compared to the December quarter, driven from Kalgoorlie Ops and Carosue Dam to deliver 129,000 ounces.

KCGM's underground Mt Charlotte operations lifted volumes of further 12% from December quarter to 527,000 tonne. This volume is above our annualized 2 million tonne per annum target for FY '23 and part of growing this operation to 3.5 million tonnes by FY '26. Carosue Dam increased underground ore grade as Callie [ph] achieved improved stope grades due to timing of the mining sequence.

The Porphyry underground mine continued development, averaging 340 meters a month. Kalgoorlie Operations' Kanowna Belle and South Kalgoorlie increased volumes and grade quarter-on-quarter, while all-in sustaining costs produced AUD 315 an ounce to AUD 1,666 an ounce due to access of higher grade mined ore from South Kalgoorlie operations.

At our Yandal production center, including Jundee, Thunderbox and Bronzewing, we sold 125,000 ounces of gold at an Australian all-in sustaining cost of AUD 1,627 an ounce. This production delivered a mine operating cash flow of AUD 137 million, up 22% from the December quarter, while we spent AUD 63 million on growth capital projects. Bronzewing spent AUD 22 million of major capital during the quarter, as the Orelia open pit achieved a full quarter of material movement from future ore into the expanded Thunderbox process plant.

Our Jundee operation achieved 682,000 tonnes of ore mined at an average grade of 4.1 grams per tonne. As a result, mined ounces were an impressive 89,000 ounces for the quarter. Total jumbo development achieved was 7.7 kilometers for the quarter, while Ramone achieved commercial production during the quarter as plant [ph] start increased. Processing throughput was consistent at 742,000 tonnes, while recovery improved to 92% with an increased head growth.

Thunderbox underground operation continued to be the high grade ore source for the mill with 476,000 tonnes of ore mined. Ore tonnes mined both underground and open pit was 1.6 million tonnes, exceeding the process volume by 46%.

Open pit volumes again increased another 13% to 5.2 million BCMs compared to the December quarter. We continued to bring on life of mine ore sources in order to provide high grade feeds to the 6 million tonne per annum process plant.

Jundee processing was steady quarter-on-quarter with reduced throughput coming from the Thunderbox mill expansion. The new Thunderbox process plant achieved 1.1 million tonnes for the quarter, down 10% on quarter two because of unplanned downtime to address design issues that have largely now been resolved.

We continue to see short-term capacity at or above the nameplate run rate of 6 million tonnes per annum, while our focus is on bedding in the new operational processes and stability. The Thunderbox project remains a key focus as increased and consistent metal throughput will drive lower costs and increased gold sales.

I would now like to pass on to Ryan, our Chief Financial Officer to discuss the financials.

Ryan Gurner

Thanks, Simon, and good morning, all. As demonstrated in today's quarterly results, Northern Star remains in a robust financial position. Our balance sheet remains strong as set out in Table 4 on page nine with cash and bullion at AUD 452 million at March 31. And we remain in a net cash position of AUD 102 million with corporate bank debt of AUD 350 million, which remains unchanged quarter-on-quarter.

Figure 7 on page nine, sets out the company's cash and bullion and investment movements for the quarter, with [indiscernible] quarter-on-quarter total cost reduction at both the all-in sustaining cost and all-in cost level, resulting in the business generating AUD 369 million of cash flow from operations and AUD 114 million of free cash flow.

Kalgoorlie and the annual production centers continue to generate positive free cash flow with capital expenditure fully funded. Pogo made a small loss this quarter as a result of operational interruption arising from damage to the ball mill motor. Importantly, the downtime was used to set up the operations for a strong Q4.

And looking ahead to Q4, operating and free cash flow is forecast to rise significantly with processing output at Thunderbox expected to increase, stronger margin from Pogo would increase production of high grade stope contribution and increase oil tailings from the open pit areas of Golden Pike and HBJ at KCGM.

Sustaining capital spend was moderately lower quarter-on-quarter, offset by increased exploration investment, which is forecast to moderate in Q4. Growth capital investment during the quarter related to key growth projects, including material movement at KCGM, Orelia open pit development in Bronzewing, Otto Bore open pit development and development in Ramone underground, which is now in commercial production.

Figure 2 on page three highlights that we are guiding group growth CapEx higher for the full year at approximately AUD 700 million from AUD 650 million. This is principally from additional waste movement at the Fimiston South cutback at KCGM. Finally, the company paid its interim FY '23 dividend of AUD 0.11 per share, totaling AUD 124 million during the quarter.

Other financial matters, depreciation and amortization are in line with company guidance provided of AUD 600 to AUD 700 per ounce. Year-to-date depreciation is at the upper-end of the guidance range of approximately AUD 686 per ounce.

For the quarter, noncash inventory charges for the group was AUD 17 million. As previously mentioned, the majority of these noncash inventory charges relate to the milling of acquired stockpiles at KCGM and are a component of EBITDA.

In respect to the company's on-market share buyback, no additional shares were purchased on market following the company's half year results release and the buyback program remains open until September this year.

Notwithstanding the challenges during the quarter, we are confident of a strong finish to the year in respect to production and lowered costs from the delivery of increased volumes at Pogo with focus on high grade stope delivery, ramp-up and throughput at Thunderbox and increased ore volumes at KCGM.

And finally, in respect of hedging, our Table 5 on page nine sets out the company is committed to hedge position of March 31. During the quarter, the company delivered 74,000 ounces into contracts and placed 390,000 ounces at an average price of AUD 3,087 per ounce and the overall hedge book is now 1.6 million ounces at an average cost of just under AUD 2,800 per ounce.

I'll pass now back to Halley for the Q&A session. Thanks.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Matt Greene from Credit Suisse. Please go ahead.

Matt Greene

Hi, good morning, all. Simon, first question on Thunderbox please. Look, we've seen a few quarters of decline in recovery. I appreciate some of this is probably due to ramping the mill. But just a commentary on the change in design of the mill. Can you just elaborate on what has changed? And has this been driven in any way by any metallurgy issues?

Simon Jessop

Yes. Thanks, Matt. It's Simon. No, certainly, no changes in metallurgy. It's all the same ore sources that we've been processing. Really, the lower recovery has been impacted by gravity circuit, I suppose, challenges in terms of uptime of that. So, that's been the main impact. Certainly, no change in terms of the ore sources.

And it's just down to stability of the process plant to be able to get a good, consistent resilience on through the tanks, et cetera. So, there have been the key drivers. So, we see that very, very short term. As stability comes to the mill expansion, you'll definitely see that recovery bounce back to normal levels.

Matt Greene

Okay. That's great. Thanks. And just on KCGM, the pickup in stripping at Fimiston South, has there been any change to the scheduling on that cutback? Or was this perhaps more an opportunistic decision to reallocate on the fleet just given some of the downtime at the mill?

Simon Jessop

Yes. It's really - when we get large weather events, which we did have during the quarter, we're sort of quarantined out of the deeper parts of the pit. So, it really is opportunistic to be able to move the fleet and maximize the fixed costs we've got for all those assets. And therefore, we've ended up moving some more waste, which is growth for the long term. It gets us close to the ore in Fimiston South. So, it's really a timing thing. But due to the multiple work fronts we've got, it's a great position to have versus just one area to mine at the base of the pit.

Matt Greene

Got it. That's great. That's all from me. Thanks.

Operator

Thank you. Your next question comes from Daniel Morgan from Barrenjoey. Please go ahead.

Daniel Morgan

Hi, team. Just on your guidance, you didn't say in your release that you're going to be at the bottom of guidance, which is a choice you could have made. You said you maintained production guidance. That must mean you have a very strong performance expected in June. Just wondering if you could go through some of the key drivers of that because it will be a very strong performance if you're above the bottom of the range.

Ryan Gurner

Yes, thanks, Daniel. So, if you go to Page 3 of the release, you'll see that updated target table that shows where those movements are. And it will show that -- yes, we indicated that Pogo impact would be 20,000 to 40,000 ounces. We put out that March 15 release related to the ball mill motor downtime. So, we've re-cut that asset to do that 225 to 240 for the full year, but certainly maintained Kalgoorlie, Yandal and the group outcome, which will indicate or instead that both Kalgoorlie and Yandal are performing very well, and we absolutely expect and set up for a very strong June quarter. And although some of those plant shuts that we completed last quarter don't exist in quarter 4 as well. So yes, we're set up for a very strong June quarter ahead and that table is the updated view of where that is.

Daniel Morgan

And traditionally, Northern Star has had very strong June quarters and then there's a little bit of a hangover into the September quarter following. Is that something that we could expect again this time?

Ryan Gurner

Strong June, Daniel. But look, growing a company from the 1.5 million to 1.6 million to 2 million ounces over that 5-year strategy, it isn't a straight on. There's step changes as things get commissioned and brought online. And there's a bit of sour teething and that's intra-quarter, intra-year and then throughout that 5-year period. So, we're still on track with progressing significant growth projects and closing them out and simplifying the business. So, you will see sour teething throughout those periods and our ultimate game is to get to that very stable, consistent throughput and production level, and then you can really hide in and work on the efficiencies and the cost out.

So, even across the quarter, our total spend across all-in sustaining costs and all-in costs reduced. And if you back in 40,000 ounces, which is really that gap, you back into that AUD 1,650 all-in sustaining cost, so it's really -- it's not about escalation in unit costs here. We've been making good savings. It's really that denominator of gold sold that's impacted that and it's what we've had to shift the full year all-in sustaining cost guidance up to that AUD 1,730 to AUD 1,760.

Daniel Morgan

And at Pogo, so good job getting that mill up and running well within the 6 weeks that you outlined. Just wondering what should we be thinking about what that outage did to the site and more on the mining side of things, like the productivity of development? Can you talk through that and what you're looking at to set up FY '24?

Ryan Gurner

Yes. So, when we guided on the up to 6 weeks, we were unsure on whether that mill needed to be taken off site or they needed to be full rewind and all that sort of things. So, they're very -- we're very pleased with the multiple streams that they anticipated in. We're able to actually repair the elements to that synchronous motor in-situ. And then obviously, once we've reestablished it, it's traveling fine. And we've really started with a strong -- very strong performance in April. So, very pleased with the work that was completed, high-quality work and the safe nature of how that was delivered. Whilst that was down, the underground mine, you don't have the luxury of that stockpile capacity in Australia.

So, we did as much waste development and establishing new areas, completed some project work that we've interrupted activity and we did build some stockpiles, but seasonally, it's difficult to get on the reserves and have that real estate, which set us up well for this quarter. So yes, we did as much as we could do. You can look in the back tables of the quarterly and see where the mining physicals have come off a bit. But grades improved and continues to improve, as we move to the stoping. We did consume some of those stoping stocks during that down period because we couldn't really consume the ore. And it's really now to set up for this stronger quarter 4 in the exit rate into 2024.

Daniel Morgan

So, it's fair to say that because of a lack of stockpile capacity, which is just what you live with, with the mine, the mine sort of got backed up a bit from the mills up further, so.

Ryan Gurner

Absolutely. Obviously, we can fairly move waste out of the mine. So, we ensured we kept the fleet busy doing that. We shut down some of the main development haulage routes to reestablish turnouts on new development headings, which would have been disruptive in the future. So, we utilized that ability to do that. And we kept all the teams active in building drill stocks and building broken stocks and filling up those ore bins and every drive need to that ore bins, so when the ore -- when the mill cracked up in April, we're able to consistently feed it.

So again, we started with a very strong April and we're confident in that guidance we've put there. And if we take out this impact, it's probably 25,000 ounces impacted off Pogo in the quarter and we've got a very strong quarter for April.

Daniel Morgan

Okay. Thank you very much.

Operator

Thank you [Operator Instructions] Your next question comes from Matthew Frydman from MST Financial. Please go ahead.

Matthew Frydman

Thank you Good morning, team. I'm interested in, I guess, the context of the corporate bonds that you've secured, whether you can remind us about how you think about the limits of the balance sheet. And I suppose your targets around net debt levels, gearing levels, particularly, I suppose, in the context of the ongoing buyback, which obviously, Ryan, as you noted, you haven't made any additional purchases since the half year results. I'm wondering what's driving that? And is it peaking around the balance sheet?

And secondly, in the context of any update you can give on the mill optimization study and how that's, I guess, playing into your thinking around future capital needs for the company?

Ryan Gurner

Yes. So, maybe I'll start and probably Stuart will come in at the end there. Yes, it's good to have you Matt, [indiscernible]. So, we've -- you would have seen - and we sort of - I'm going to say it's probably 2 years ago, we put out some guidance around just some targets financially where we want to sort of keep the company. So, from a leverage perspective, that's 1.5 -- 1.5 times leverage is where we sort of - this net debt to EBITDA is where we sort of want to play at the moment with the business and then gearing sort of around that sort of 20% -- up to 20%.

Broadly, the concept would be or theory would be that we're okay to go outside those frameworks for the right opportunity if there's a pathway back that we can see to come back into those metrics. For us there, those investment-grade metrics that we want to keep on hold. We've got this long-term funding now. The last few years have been transformational for the business. It's allowed us to go to this market. Obviously, traditionally, we've always relied on short-dated bank debt. And now the company has the opportunity to look at longer-term funding, which aligns to our asset base and our reserves of that 10-year life sort of thing.

So Stuart, if you want to talk about the...

Stuart Tonkin

Yes. So again, I'll just highlight that, that 10-year tenure, obviously, investment-grade rating remain, the coupons attractive to us with that policy. The Fimiston study still to be evaluated presented and a decision to be made on that and that will happen this calendar year. But in relation to uses of cash and returns for shareholders, the buyback proceeds and the bond proceeds are all things that we're considering what we'll do with Fimiston before we apply those. So, you're right in saying we still got through to September to utilize that buyback, it's been 40% complete, but we want to get to that understanding of the ultimate CapEx for Fimiston and the financial metrics and a decision on the allocation of that capital.

Matthew Frydman

I guess given that you do now have some pretty long-dated debt, you've got a lot of headroom on the balance sheet relative to those metrics that you outlined. It seems like you could maybe push a bit harder on the buyback, but understanding that, obviously, there's another piece of work going on in the background.

Stuart Tonkin

It all just compares to -- we've got significant options for us. So, there's lots of organic options within the business and how to generate those superior returns. So, the buyback today has been -- we've achieved an average unit of AUD 8.20, so we're trading by AUD 13, close to AUD 14. The returns on that acquisition is fantastic. We still look at the returns coming in on the Fimiston feasibility as a very compelling investment. So, we're really getting circled up on where that is at. And that's what's competing with the application.

We obviously just paid out the dividend. That's been continuing to grow. These are all great positions and good signals of what a strong thorough business is delivering. The buyback is there as an instrument of tool of capital management, but it doesn't have to be utilized, it's there through to September and we'll revisit that. It's the first time we've done that. We'll revisit that. And it can be extended or it can be expanded. So, we've got no issues with utilizing it.

Matthew Frydman

Got it. Very clear, thanks. That's all from me.

Operator

Thank you. Your next question comes from Mitch Ryan from Jefferies. Please go ahead.

Mitch Ryan

Good morning, team. Thank you very much for taking my questions. Just one simple one. Just the increase in CapEx at KCGM, that's very clearly a pull forward of material movements. I wonder if you can comment on the inflationary environment that you're seeing around KCGM. And if there has been any other pressure on the other component of CapEx?

Stuart Tonkin

Yes. So, we haven't seen any inflationary increases, albeit we feel we're at an elevated anyway, but we haven't actually seen that continue to push and there's been some stabilization, as I said, on staffing, turnover and skills. So, that uplift primarily by volumes, it's all volume related and getting more for the increased expenditures. So -- and as well around new developments up in Yandal, those are the extra things that have been accelerated to be that extra CapEx. So, it's CapEx that will come out of future years and get us to more quicker like Simon indicated in the south of Fimiston.

Mitch Ryan

Thank you.

Operator

Thank you. [Operator Instructions] Your next question comes from Kate McCutcheon from Citi. Please go ahead.

Kate McCutcheon

Hi, good morning. On the hedge book, your total books come up quarter-on-quarter. Some of your peers will be unhedged from next quarter. Does the longer-dated debt change anything on your hedging strategy? Or any comments on the hedge book here and that strategy going forward?

Stuart Tonkin

Yes. Look, we've got a pretty clearly stated hedge policy, and we've maintained that. It's -- we can't necessarily compare us to other goldies. We probably do look like a bit of an outlier there, but it's on the ounce profile we have, the growth CapEx forecast we're delivering, it's still quite modest and it's priced well. So, 1.6 million ounces and nearly AUD 2,800 an ounce. The additions that we added in the quarter were well over AUD 3,000 an ounce.

And if you comp our hedge book against every bank's forecast, they've got gold prices coming off and we've got gold price going up. So, it's something different there. But I'm confident that our policy has worked well for us today. But typically, when we either have debt and/or investing growth capital, we maintain that hedge profile policy. And we've been sure we keep delivering into it. There's no legacy issues there. We've still got over 75% to 80% of our production delivering spot. So, it's working well for us.

Kate McCutcheon

Okay. Thank you.

Stuart Tonkin

Thanks, Kate.

Operator

Your next question comes from Al Harvey from JPMorgan.

Stuart Tonkin

I can't you see Al.

Operator

Apologies. Al, your line is now live. You may have yourself muted. Thank you. There are no further questions at this time. I'll now hand back to Mr. Tonkin for closing remarks.

Stuart Tonkin

Well, thanks for joining us on the call today on a very busy reporting day. We look forward to updating you next quarter on our full year results as we continue to advance our profitable organic growth strategy. Have a great day. Thanks.

Operator

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