When searching the gold mining industry for value opportunities, investors should include the ownership-to-compensation ratio in their analysis because, when this ratio is computed for a top manager of the company's board, it has a strong ability of predicting its performance on the stock market. This is what the Shareholders Gold Council - a group created at the beginning of 2018 by John Paulson (Trades, Portfolio) and other large investors – suggested in its first investor survey as reported by The Financial Post on Monday.
The ratio measures how many times the compensation of the top manager is included in the value of their ownership stake. The higher, the better because it means they are investing alongside shareholders.
The best performer on the stock market over the last five years – according to the report - was Northern Star Resources Ltd. (NESRF, Financial) (ASX:NST, Financial). The stock delivered a nearly 870% return to its shareholders and the ownership-to-compensation ratio of 10.6 for CEO Bill Beament was also the best among the analyzed companies.
Let's take a closer look at this stock as it could be a good candidate for investors who are repositioning their portfolio in preparation for a potential year-end rally in the gold price following an expected hike in the interest rate by the Federal Reserve.
Northern Star Resources is an Australian gold producer and mineral resources explorer and developer. The core of its portfolio of mineral assets is composed of the Paulsens underground mine, which is located on the border of the Ashburton and West Pilbara Mineral Fields in Western Australia, the Jundee, the Kanowna Belle and the East Kundana underground mines, all of which are located in the Goldfields region of Western Australia. The Kundana underground mine is in a joint venture with Tribune Resources Ltd. (ASX:TBR, Financial).
The company has also a gold-producing asset in Alaska. As announced on Aug. 30, Northern Star acquired the Pogo underground gold mine for $260 million.
Further, Northern Star Resources owns a 40% interest in the Central Tanami Project.
Northern Star is producing the precious metal from a total of nearly 4.8 million ounces of gold, which is – as of Sept. 30 - in proven and probable reserves. The total gold resources, which also include those from the Pogo underground gold mine in Alaska, is estimated to be about 20.5 million ounces.
From its proven and probable gold reserves, the miner milked 244,853 ounces of gold in the first quarter of fiscal 2019, which ended Sept. 30. Production from the Pogo mine was not included because the company took management control of the asset only two days before the end of the quarter. The realized price from the sale of the yellow metal averaged AU$1,691 per ounce during the quarter and the miner reported approximately $187 million in revenue.
Looking ahead, Northern Star Resources aims to produce 850,000 ounces to 900,000 ounces from its Australian operations at an all-in sustaining cost of $777 to $851 per ounce of metal sold in fiscal 2019.
From its Pogo underground gold mine in Alaska, the company guides production of between 250,000 ounces and 260,000 ounces of gold at an AISC of about $880 per ounce of metal sold.
As you have noticed, Northern Star Resources is producing the yellow metal at a competitive cost. The company's AISC is one of the lowest in the gold mining industry. For comparison, Barrick Gold Corp. (ABX, Financial) – the world’s largest gold producer - is targeting an AISC of $765 to $815 per ounce of metal sold in full fiscal 2018
The low-cost structure is the result of producing assets located in world-class production centers that the company is managing and operating efficiently. The Australian miner has also beaten most of its direct competitors in terms of a higher trailing 12-month earnings before interest, taxes, depreciation and amortization margin. Northern Star Resources delivered a trailing 12-month EBITDA margin of 45.5% versus an industry median of nearly 24% when gold averaged $1,296.96 per ounce.
The share price of Northern Star Resources increased 49% over the 52 weeks through June 30 and outperformed the Van Eck Vectors Gold Miners Exchange-Traded Fund (GDX, Financial) by the same rate.
The stock outperformed the index by 42% and was trading around $5.74 per share at close on Monday for a market capitalization of about $3.67 billion.
The closing share price on Monday was far below the 50-day simple moving average line and slightly below the 100-day line, but far above the 200-day line. The share price was also 4.6% higher the midpoint of the 52-week range of $4.25 to $6.72.
Northern Star Resources is also one of the few players in the gold industry that is distributing dividends. The forward dividend yield is 1.22% versus an industry median of 3.36%.
For the next 52 weeks, consensus is for a hold approach on Northern Star Resources. The average target price is $8.31 per share, reflecting nearly 45% upside. Therefore, I would wait for a significant weakness in the market value before adding Northern Star Resources. A price-book ratio of 5.77 versus an industry median of 1.74 and an EV-to-EBITDA ratio of 10.29 compared to an industry median of 9.3 also suggest the closing price on Monday may not be convenient.
GuruFocus has assigned a financial strength rating of 8 out of 10, indicating that Northern Star Resources is basing its business on solid financial pillars and is prepared to sustain slowdowns and recessions. For the subsequent quarters through June 30, 2019, the Australian gold mining company is targeting organic growth to be accomplished across its entire line of operations through the allocation of about $55 million for exploration and drilling and approximately $53.4 million as expansionary capital.
Disclosure: I have no positions in any securities mentioned in this article.
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