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Gold Price Surge Faces Operational Hurdles for Miners
Gold markets have recently experienced a remarkable surge, with prices escalating from US$2,000 to US$3,300 per ounce within a year—a significant rally that many anticipated would benefit gold miners substantially. Particularly, companies such as Northern Star Resources (ASX: NST) are viewed as providing leveraged exposure to these rising prices through production increases and potential dividends, promising better returns than merely holding physical gold. However, Northern Star’s recent quarterly performance report illustrates a stark reminder: operational challenges can undermine even the most promising market conditions.
A Challenging Quarter for Northern Star
The results for Northern Star’s March quarter revealed a disappointing combination of lower-than-expected production numbers and unexpectedly high operational costs, leading the company to underperform against consensus estimates. Here’s a breakdown of the key metrics:
| Metric | Actual | Consensus | % Beat/(Miss) |
|---|---|---|---|
| Group production | 388.4koz | 415.3koz | (6.5%) miss |
| Kalgoorlie production | 202.3koz | 227.0koz | (10.9%) miss |
| Yandal production | 118.6koz | 129.0koz | (8.1%) miss |
| Pogo production | 67.5koz | 67.0koz | +0.7% beat |
| Group AISC | A$2,246/oz | A$2,089/oz | (7.5%) miss |
| Kalgoorlie AISC | A$2,139/oz | A$1,931/oz | (10.8%) miss |
| Yandal AISC | A$2,398/oz | A$2,179/oz | (10.0%) miss |
| Pogo AISC | A$2,292/oz | A$2,447/oz | +6.3% beat |
Source: Northern Star
The shortfall in performance can be attributed to several factors, including:
- Delayed Higher-Grade Ore at KCGM: Reduced ore grades at the Kalgoorlie Consolidated Gold Mines (KCGM) operation affected production levels.
- Elevated Maintenance Costs at Yandal: Unforeseen maintenance expenses negatively impacted profitability.
- Increased Royalties: Rising gold prices led to higher royalty payments, contributing to overall costs.
Management remains cautiously optimistic about improving mining efficiency in the upcoming June quarter, but the company has revised its FY25 guidance downwards, reflecting more challenges ahead.
| Metric | New Guidance | Prior Guidance | % Change (midpoint) |
|---|---|---|---|
| Gold sold | 1,630–1,660koz | 1,650–1,800koz | Down 6.4% |
| AISC (FY25) | A$2,100–2,200/oz | A$1,850–2,100/oz | Up 14.6% |
| Growth capex (FY25) | A$950m–1.10bn | A$950m–1.02bn | Up 3.9% |
Source: Northern Star
Analysts from Macquarie note that their initial forecasts for FY25 included 1,690koz in gold sales at an AISC of A$2,041/oz, highlighting that Northern Star’s revised guidance falls short of production expectations and exceeds cost estimates.
Long-Term Growth Amid Short-Term Setback
Despite the underwhelming quarterly report, Macquarie retained an "Outperform" rating for Northern Star, fixing a price target of $27.00. The firm regards Northern Star as the preferred choice among ASX 50 gold stocks, largely due to its recent strategic acquisition of De Grey Mining, which contributes significantly to production and reserves.
The merger is expected to benefit De Grey shareholders by providing 20% equity in the combined entity, enhancing overall reserves and efficiency in operations.
Nevertheless, potential downgrades to target prices and earnings forecasts may arise in the short term due to the recent production and cost misses, which could dampen immediate investor sentiment even while long-term growth prospects appear brighter with the De Grey acquisition.
Weighing Gold vs. Gold Miners
The current performance issues faced by Northern Star underscore a broader dilemma in gold mining investments: operational risks can often overshadow the benefits associated with soaring gold prices. While investing in physical gold allows for straightforward exposure to price increases, miners contend with numerous challenges, including inflation, labour shortages, adverse weather conditions, and project delays, all of which can impede profitability.
Notably, many large-cap gold miners have struggled to capitalise on the ongoing gold rally. Over the past few years, increasing operational costs and disruptions have eroded profit margins, complicating the expectation of significant returns from these investments. Northern Star’s current share price illustrates this disconnect:
- Year-to-Date: Up 29%, slightly surpassing gold’s own rise of 25%.
- Past 12 Months: Up 32%, significantly behind gold’s impressive 42% increase.
This performance gap suggests that investing in physical gold or gold ETFs could represent a more straightforward, less volatile method for benefitting from rising gold prices without the operational complications associated with mining companies like Northern Star.
