Northern Star Resources Limited (NST) Earnings Call Transcript

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

Good morning, and thanks for joining us for what is a call with a bit of a difference. The results released today by Northern Star and Saracen are entirely separate. They each relate only to their particular company. The financial accounts of the 2 companies will be merged from the 12th of February this year. That said, we are happy to take questions today on either company, and we have Saracen Managing Director and now Northern Star Managing Director, Raleigh Finlayson, with us on the call. Also joining us today are Northern Star CFO, Ryan Gurner; our CEO, Stuart Tonkin; and Saracen CFO, Morgan Ball. Turning to Northern Star's results. You can see it has been a record 6 months on all fronts. We have met or exceeded all our key objectives. Gold sales were at the top end of guidance for the first half, and we're on track to meet full year guidance, which, as we previously foreshadowed, will be weighted to the second half. I would like to draw particular attention to the growth in production, our record free underlying company cash flow of $226 million, which was up 94%; and our return on equity, which was an outstanding 17.4% on an annualized basis. These 3 figures are at the heart of the Northern Star story. They show that our growth strategy is on track, but they also underline our key investment thesis that we don't just grow for growth's sake. The name of the Northern Star game is maximizing returns for all stakeholders. In the case of our shareholders, part of the strong return can be seen in the 27% increase in the interim dividend to a record $0.095 per share fully franked. It is also notable that we invested $108 million in exploration and expansion capital. This shows, not only are we growing returns today, but we are setting the company up for further growth tomorrow. Our appetite for growth is also reflected in our strategy to continue reducing our hedge book. We saw the recent softening of the gold price as an opportunity to close out another significant slice of our hedge book with 39% of our sales in the 6 months going into hedges. As a result, our revenue was well over $100 million lower than would have been the case had we sold all our ounces at spot. We have now reduced Northern Star hedges to just 10% of the next 3 years' production. Coupled with Saracen's book we are inheriting, combined group hedges rise to around 14%, 15%. This philosophy of maximizing returns and our commitment to reinvesting for tomorrow has been central to Northern Star's success. We invest for growth, but it must be financially rewarding growth. This philosophy is shared by Saracen and was one of the factors which contributed to the success of our merger discussions. Saracen has, today, announced that it, too, recorded strong growth and record production in the past 6 months. And it also invested $233 million in growth projects and exploration over this period. Together, this means our combined group is well on track to deliver on our growth strategy, which gives us a clear pathway to 2 million ounces a year, driven by organic growth and with a growing inventory. I will now ask Ryan Gurner to provide a brief outline on Northern Star's financial results, and then we will open the call to questions. As I mentioned at the start, we are more than happy to take questions on both Northern Star and Saracen's accounts. Thanks, Ryan.

Great, Bill. Thanks, and morning all. It gives me great pleasure to present to you our financial results for the first half of 2021. As Bill highlighted, the results and material -- materials presented here are in respect of Northern Star only. The merger with Saracen will take effect from the 12th of February, meaning the earnings and results of Saracen will be incorporated into NST from this date forward. I'd like to start you all on Slide 7, which provides an overview of the key financial highlights achieved during the first half of FY '21, with increases across all metrics with the company delivering an underlying net profit after tax of $194 million and statutory profit after tax of $185 million; EBITDA of $472 million, which is up 47% from the first half of FY '20. We generated great cash flow this half with $339 million of net mine cash flow recorded from the operations. Our group underlying free cash flow, which adjusts for nonrecurring items, mostly M&A activity and movements in bullion, was $226 million, up 94% on the prior half. Today, we continue our demonstrated history of returning funds to shareholders by announcing an interim fully franked dividend of $0.095 per share, up 27% on prior year, which will total $111 million paid to shareholders. This dividend is consistent with our framework of a distribution targeting 6% of revenue and has been considered in respect of the expanded capital base post merger. The record date set for the interim dividend is 9th of March and payment date, 30 March. Lastly, we remain well positioned to deliver on our near-term, low-capital intensity organic growth profile with our strong balance sheet, which includes $372 million in cash bullion and investments at 31 December. Over the page to Slide 8, which outlines the strong cash flow generation during the half. A total of $544 million of operating cash flow and $339 million of net mine cash flow was generated from the operations, both substantial increases on prior periods; Jundee, a standout with $167 million contribution, a record for the operation. The result of investment and hard work completed to date at Pogo is self-evident, with a substantial increase in operating cash flow in the first half to AUD 114 million and net mine cash flow of AUD 44 million. This is also within the context of operational challenges experienced with COVID and highlights the resilience of the operation and success of risk management activities implemented. The processing infrastructure expansion to 1.3 million tonnes per annum remains on track with USD 16 million of capital spent in respect to this plan upgrades to 31 December. KCGM continues to excel with a solid 6-month contribution of $91 million net cash flow. And whilst Kalgoorlie operations are still recording good cash generation, we are expecting these assets to lift their contribution in the second half of the year. Now down to Slide 10, which outlines a reconciliation of underlying net profit after tax from this first half of FY '20 to half 1 FY '21 and then to statutory net profit after tax. The company achieved a record underlying net profit after tax of $194 million with the main drivers of the profit result relating to the group's increased production alongside the tailwind of a rising gold price. Costs have been well managed through targeted cost initiatives and operational productivities, which will continue to be a focus in the second half of FY '21, particularly at Pogo and KCGM. Higher, mostly noncash inventory charges were reported from the utilization of acquired stockpiles at KCGM, and higher D&A charges were a result of our increased production base. During the first half, the company incurred $4 million in acquisition and integration costs associated with the merger with Saracen. These acquisitions -- acquisition-related costs, along with a noncash exploration impairment of $9.5 million, gave rise to a statutory net profit after tax of $184 million. Over the page to Slide 11, which highlights the key cash flow movements, where a record group operating cash flow of $426 million was generated during the half, primarily from the stronger performance of Pogo and inclusion of KCGM. This great result also includes $32 million of stamp duty paid on the KCGM acquisition. At the halfway mark of FY '21, our organic growth projects remain on track with approximately $57 million invested. This, of course, is net of the $40 million in gold revenue received from preproduction gold sales at KCGM, which offsets the development costs during this phase. NST total guided growth capital is $198 million for FY '21. The company has paid back $325 million in corporate bank debt and delivered $200 million in fully franked dividends to shareholders in the past 6 months alone. And at 31 December, we still retained $317 million in cash. And finally, and as presented in Slide 12, given the strong cash flow generated by the business, our balance sheet remains in great shape and supports our growth strategy. At 31 December, we have $672 million in liquidity with cash, bullion and investments of $372 million and access to $300 million in undrawn facilities. As Bill mentioned, we remain lightly hedged, and NST is well positioned to take advantage of the favorable gold price environment with only 10% of production hedged over 3 years. And we also remain lightly geared with corporate bank debt of $375 million at 31 December. Thanks, guys. I'll now open back to Melanie for questions.

[Operator Instructions] Your first question comes from David Radclyffe from Global Mining Research.

Just had a couple of quick questions on the accounts and the Saracen merger. So in regards to the stamp duty, I see there's been no uptake or even an update on the estimated value. So what's your current expectations of when this would be determined and then, more importantly, paid?

Yes, David, Ryan here. The stamp duty amount relates to the consideration paid. So that will be a factor of the merger ratio, and then, obviously, our share price on the implementation date, which is Friday. So -- and then stamp duty is 5 -- basically 5% of that value. There's some items that aren't due. So we're still going to go through a bit of that work. At this stage, just look, it's going to be probably sub $300 million but around that mark, and we won't truly know what that number is for a few months ahead. But that's probably what we're estimating at the moment.

And timing.

Timing of payment, depends on the government. To give you some indication, I mean we paid our case. So we settled case on the 2nd of January. So -- and we've only just paid our KCGM. So you're talking 9, 10, 11, 12 months, but it's up to the state government, really. That's what our expectation would be.

Yes. That's helpful. And then in regards to the transaction costs you recognized for the full year, have these changed at all now that you're effectively complete? And then can you remind us what you actually expect to expense for the full year?

Yes. So look, there's lots of moving parts. Obviously, big, big merger. Stamp duty is a big one, and that won't get booked until the second half because the transaction's only going to complete on this Friday. So second half is when the earnings -- when the stamp duty amount will impact earnings. And then it's a $16 merger. So there's lots of moving parts, David, and we've got to go through all that. There's lots of accounting to do. So yes, we've got to, number one, settle on the values and then how they relate to our balance sheet and then all the transaction cost. But the largest transaction cost is the stamp duty that's going to impact earnings.

Your next question comes from Nick Herbert from Crédit Suisse.

Can I just sort of clarify a point just following on from David's question just there? So the goodwill on the transaction, is that what you're referring to? Are you able to give sort of an indication of what that range will be? Just to help us out with what we can sort of forecast there from an amortization perspective from the full year.

Nick, when it comes to good -- well, goodwill is rare in mining transactions, as you probably know. There could be some out of this transaction, the work has to be done because of the relative close proximity of the assets. I don't think -- yes, look, Nick, we just don't know what that number is going to be, mate, to be honest. And I wouldn't want to present a number now and then it had to be 0 or something larger. So I think if you try to work through earnings and balance sheet amortization, I think if you just simply look at Saracen's market cap and basically bring that -- bring it on to our balance sheet, if you're trying to look at earnings in the second half, I think that's the best way to look at it as opposed to just trying to separate out goodwill because we could have none or we could have a meaningful number. Until we do the work, we're not going to know.

Okay. Yes, no problem. And then secondly, just on the topic of synergies, I mean you've spoken a lot about this in the past. But just wondering now that we're another sort of few months down the path since you first disclosed those, just wondering if there's an update on your thinking there and how we should think about timing of those over the next 6 to 18 months. And also just a clarification on how much of that is cash versus noncash.

Yes. Look, I'll hand to Ryan in a minute on the cash and noncash components. So yes, so just obviously highlight, we tabled $1.5 billion to $2 billion of potential synergies on the merger. Look, timing on that, Nick, so look, management teams were all bedded down now and all that stuff's sorted out and has long gone. Obviously, it all completes on Friday. From merger and the synergies space, we've got a lot of management strategy sessions in bringing the wider group into the fold next month. And we've got resource reserve updates going with that, and obviously, that feeds into budgets in May, June. So our expectation is July when we do our Annual Strategy Day and our -- I guess, our launch pad into diggers and dealers is when we'll clearly articulate the synergies and the opportunities that go with that. And also just to emphasize on the synergies piece is we had very little in there on material flow. That's the piece that we said back in when we announced the deal, we need time to do that. And that's what our teams behind the scenes are rapidly evolving. And I think there's some really good opportunities over and above what we've told the market on that material flow. And Ryan?

Well, they're all cash, Nick, at the end of the day. As we sort of put out there, there's a tax component which is probably going to be a longer-dated or it's going to come out over a longer period of time. It's probably 10 years because depending on the asset life and attributable value to each of those assets. So almost half the value is that, over that sort of 10-year period.

Your next question comes from Al Harvey from JPMorgan.

Yes. Just following up on the synergies. So you're kind of expecting to put that out there May, June. But so does that kind of mean not expecting any synergies to flow through to your guidance this year? So just kind of looking at the aggregated FY '21 Northern Star-Saracen guidance? Is this still likely to be pretty firm or bit of upside here? And second question is just if you've got any updates on your thinking of your dividend and hedging policies as part of the expanded entity.

Yes. Thanks, Al. Look, just back on the synergies here. So look, we'll put a lot of color on that in our strategy session in July. So it's not May, June. It's July. So we always did at the back end of July, launching into diggers. And as I said earlier on, we need that time because there's an added piece of the extra opportunity of material flow and expansions of certain operations. So we want to make sure we're going to do that technical work behind the scenes, which is well advanced and headed the right way. Look, understand what Ryan just said is there's a huge opportunity on our synergy piece as far as combining the 2 entities and the taxation opportunity with that. Obviously, we're both extremely profitable operations and companies, like we just delivered both results today. So there is the opportunity to obviously get some of that in the remainder of this financial year and, as Ryan said, and amortized for the next few years thereafter. And on dividends here, look, our dividend policy, 6% of revenue won't change. So really awesome result to announce a record interim dividend today, and it's really great to have the new shareholders from Saracen participate in that dividend as well, which is awesome. And our hedge profile, like obviously, we've inherited Saracen's hedge book, so that pushes up from sort of now sub 10 to now 14%, 15% over the next 3 years' production. But we're in our policy limits that we've clearly articulated to the market over a number of years of what our hedging policy is. So we obviously inherited a little bit higher ratio. But as a combined entity and our forecast production, we're well in truly within our treasury zone of 20% to 40% hedged in a rolling 12 months and then sort of 10 to 20 thereafter, and then sort of 0 to 10 in the third year. So very comfortable, but we've done a really good job. Both companies reduced their hedge book to be able to participate in a much higher gold price compared to our peers when you look at their hedge books on a much lower gold price compared to where we sit now.

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

I just wanted to further flesh out the dividend and capital management under the new mergeco. Bill, you stated that you won't be changing that 6% of revenue dividend targets. But can you just talk around any implications from merging the 2 companies in terms of tax losses or franking credits? And would you be considering any buybacks, given the strong cash flow generation?

I'll hand to Ryan on the franking.

Yes. I mean so the franking, so we'll -- we don't take any credits that Saracen has. Obviously, Saracen just paid out a special dividend as well. Yes. Look, we've got plenty of franking credits, so we could pay out our total cash balance in franked dividends. So there's no problems there from a franking sense.