Northern Star Resources Limited

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 for the two 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; CEO, Stuart Tonkin; and Saracen's CFO, Morgan Ball.

Turning to Northern Star's results. You can see it as being a record six 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 cash – underlying company cash flow of A$226 million, which was up 94% and our return on equity, which was an outstanding 17.4% on an annualized basis. These three figures are at the heart of the Northern Star story.

They showed that our growth strategies on track, but they also underline our key investment thesis that we don't just grow for growth side. 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 9.5¢ per share fully franked. It is also notable that we invested A$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 flaws of our hedge book with 39% of our sales in the six months going into hedges. As a result, our revenue was well over A$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 three years production. Coupled with Saracen's book we are inheriting, combined group hedges raised 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 six months.

And it also invested A$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 a great pleasure to present to you our financial results for the first half of 2021. As Bill highlighted, the results and materials presented here are in respect of Northern Star only.

The merger with Saracen would take effect from the 12th of February, mainly earnings and results of Saracen will be incorporated into NST from this date forward. I'd like to start you on Slide 7, which provides an overview of the key financial highlights achieved during the first half of FY 2021 with increases across all metrics with the company delivering an underlying net profit after tax of A$194 million and statutory profit after tax of A$185 million, EBITDA of A$472 million, which was up 47% from the first half of FY 2020.

We generated great cash flow this half with A$339 million of net mine cash flow recorded from the operations. Our group underlying free cash flow, which adjusts for non-recurring items, mostly M&N activity and movements in bullion was A$226 million, up 94% on the prior half.

Today, we continue at demonstrated history of returning funds to shareholders by announcing an interim fully franked dividend of 9.5¢ per share, up 27% on prior year, which will total A$111 million paid to shareholders. This dividend is consistent with our framework of a distribution targeting 60% of revenue and has been considered in respect of the expanded capital base post-merger.

The record date sets to the interim dividend is 9 of March and payment date 30 March. Lastly, we remin well positioned to deliver on our near-term low capital intensity organic growth profile.

We have strong balance sheet, which includes A$372 million of cash, bullion and investments at 31 December. Over the page to Slide 8, which outlines strong cash flow generation during half, a total of A$544 million of operating cash flow and A$339 million of net mine cash flow was generated from the operation; both substantial increases on prior period.

Yandal stand out with A$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 A$114 million and net mine cash flow of A$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 reminds on track with $16 million of capital spent in respect of this plan upraise on 31 December.

KCGM continues to excel with a solid six-month contribution of A$91 million net cash flow and whilst Kalgoorlie operations are still recording good cash generation we're 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 FY20 to half one FY21 and a statutory net profit after tax.

The company achieved a record underlying net profit after tax of A$194 million with the main drivers of the profit result related to the group's increased production alongside the tailwind of the 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 FY21, particularly at Pogo and KCGM.

Higher mostly non-cash inventory charges were recorded from the utilization of acquire stockpiles at KCGM and higher D&A charges were a result of our increased production base. During the first half, the company incurred A$4 million in acquisition and integration costs associated with the merger with Saracen.

These acquisitions – acquisition related costs along with a non-cash exploration impairment of A$9.5 million gave rise to a statutory net profit after tax of A$184 million. Over the page to Slide 11, which highlights the key cash flow movements where record group operating cash flow of A$426 million is generated during the half, primarily from the stronger performance of Pogo and inclusion of KCGM.

This growth result also includes A$32 million of stamp duty paid on the KCGM acquisition. At the halfway mark of FY21, our organic growth projects remain on track with approximately A$57 million invested.

This of course is net of the A$40 million in gold revenue received from pre-production gold sales at KCGM, which offset the development cost during this phase. NST total guided growth capital is A$198 million for FY21.

The company has paid back A$325 million in corporate bank debt and delivered A$200 million in fully franked dividends to shareholders in the past six months alone, and at 31 December, we still retained A$317 million in cash. And finally, and as presented in Slide 12, given the strong cash flow generated by the business, our balance sheet reminds in great shape and supports our growth strategy.

At 31 December, we have A$672 million in liquidity with cash, bullion and investments of A$372 million and access to A$300 million in undrawn facilities. As Bill mentioned, we remind lightly hedged and NST is well positioned to take advantage of the favorable gold price environment with only 10% of production hedged over three years.

And we also remain lightly geared with corporate bank debt of A$375 million at 31 December. Thanks guys.

I'll now open back to Melanie for questions.

Hi. Good morning, Bill, Raleigh and team.

Just had a couple of quick questions on the accounts and the Saracen merger. So in regards to the stamp curiosity, there has 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 day, which is Friday.

So, and then stamp duty is basically 5% of that value, but some items we will not give. So we still got to go through a bit of that work.

At this day just look it's going to be probably sub $300 million, but around that mark. And we won't really 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, it depends on the government to give you some indication, I mean, we paid our cash – so we settled cash on the 2 of January. So – and we've only just paid our cash again.

So you're talking 9, 10, 11, 12 months that's up to the state government really, but that's what our expectation would be.

Yes, thanks. That's helpful.

And then in regards to the transaction culture 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 there's lots of moving parts, obviously big merger [indiscernible] is a big one. And that might get booked into the second half because the transactions are 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$6 billion merger, so there's lots of moving parts though and we've got to go through all that. There's lots of accounting to do.

So, yes, we've got number one fit along the values and then how that are relate to our balance sheet and then all the transaction costs that the largest transaction cost of the stamp duty that's going to impact earnings.

Okay. Thank you.

Thanks. Hi, all.

Can you just sort of clarify the point that's following on from David's questions 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 goodwill – well, goodwill is rare in mining transactions as you probably know. There could be some out of this transaction, but the work has to be done because of the relative close proximities of the assets.

I don't think – look, Nick, we just don't know what that number is going to be to be honest. And I wouldn't want to present a number now and then it had to be zero 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 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 trying to separate out goodwill, because we could have none, we could have a meaningful number until we do the work.

We're not going to know.

Okay, no problem. Thank you.

And then secondly just on topic of synergies, I mean, you've spoken a lot about this in the past. And I'm just wondering now that we're – now that sort of few months down the path since you've first disclosed those.

And just wondering if an update you are thinking there? And how we should think about timing of those over the next six to 18 months?

And also just a clarification on how much of that is cash versus non-cash?

Yes, look, I'll hand to Ryan in a minute on the cash and non-cash component. So, yes, so just obviously highlight.

We came in A$1.5 to A$2 billion of potential synergies on the merger with timing on the hedge. So look the management claims we’re all bended down now and all that stuff sorted out that's ongoing, but obviously it all completes on Friday.

From merger and the synergies place, we've got a lot of management strategy sessions and bringing the wider group into the fold next month. And we've got resource reserve updates going with that and obviously that feeds in the budgets in May, June.

So our expectation is July when we do our Annual Strategy Day and now gets – launched that into Diggers & Dealers is when we'll clearly articulate the synergies and the opportunities that go with that. And also just to emphasize on the synergies places, we had very little in there on material flow.

That's the place that we set back in when we announced the deal. We need time to do that and that's what our teams behind the scenes rapidly evolving.

And I think there are some really good opportunities over and above what we've told the market on that material flow. And Ryan?

Well, they're all cash need at the end of that. As we sort of put out, there's a tax component, which is probably going to be a longer – 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 loss and attributable value to each of those assets. So, well almost half the value is that sort of 10 year period.

Okay. Yes.

Thanks gens.

Thanks, Nick.

Yes, good morning, Bill and team. Just following up on the synergies.

So, you are kind of expecting to paid out May, June, but [indiscernible] not expecting any synergies to flow through to your lines this year? So just kind of looking at the aggregated FY 2021 Northern Star’s has some guidance into this, still likely to be pretty internal 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 expand in entity? Cheers.

Yes, thanks. Look just back on opportunity there, 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 do that back end of July launching into Diggers.

And as I said earlier on, we need that time because, there's an added pace of the extra opportunity of material flow and expansions of certain operations. So, we want to make sure we'll be able to do that technical work behind the scenes, which is well advanced and heading in the right way.

Look, I understand what Ryan just said, there’s a huge opportunity on now, as soon as you place, as far as you now combined the two entities and the taxation opportunity with that. Obviously, we’re both extremely profitable operations and companies, what were just delivered both results fit today.

So, there's the opportunity to obviously get some of that. And a reminder this financial year, and as Ryan said, entourage [ph] for the next few years thereafter.

And on dividend policy fixed revenue wind chimes, so really awesome results announced a recording income 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’s pushed us up from sort of sub-10% to now 14%, 15% of the next three years production.

But we’re in at policy limits that we've clearly articulated the market over a number of years, what our hedging policy is. So, we are obviously varying a little bit high ratio, but as a combined entity and full cost production we're run truly within our treasury zine of 20% to 40% hedge in a rolling 12 months and then sort of 10% to 20%, there after then sort of 0% to 10% in the third year.

So, I'm very comfortable. But we've done a really good job, both companies reduced their hedge book to be up, reduced by a massive high gold price compared to MPs, when you look at their hedge book from on a much lower gold price compared to where we sit now.

All right, thanks.

Good morning Bill and team. I just wanted to further flush out the dividend and capital management term under the new wage code.

Bill you cited that you won't be changing that 6% of revenue dividend target. But can you just talk around any implications from merging the two companies in terms of tax losses or banking credits?

And would you be considering any buybacks given the strong cash flow generation?

I’ll hand it over to Ryan on franking.

Yes, so the franking stuff, we don't take any credit that Saracen has. Obviously, Saracen just paid out a special dividend as well.

Yes, we've got plenty of franking credits, we just added total cash balance in franking dividends. So, there's no problems there from a franking sense.

Yes, look buyback time on our radar. So, I think from that side of things, we've probably got one of the world’s capital intentions in our production growth moving forward, but we like having a healthy balance sheet.

We've always never hidden behind that. We got great growth.

Saracen is spending a bit we require lot of combined. We're in a really good zone.

So, we think that our current policy has 6% continue to grow our production up 1.6 to 2 and having a healthy balance sheet and obviously paying off that debt that we've inherited is a very good point.

Okay. Thank you.

And then just in terms of growth, you did say in your opening remarks that you want to invest in growth, but it must be rewarding growth. Can you define this in regards to organic and inorganic options?

Are you going to be more metric based or is it now more of a strategic based decision as well?

No, look, obviously, we've always been disciplined from an MA& perspective. And you always take your balance sheet healthy to look at stuff in the future.

And we've never hit minus. When actually the right opportunities come up, we'll always look at that.

But it has to complement our assets. We've got a really good [indiscernible] from 1.6 to 2.0, it’s not a lot of capital to get there.

And then when you come back and when we start off picking up at least we’ll be having a lot more moving forward on assets like KCGM and the potential of deploying capital there on that side of electrical system, it's pretty hard to spend money elsewhere.

Okay. Do you think though that now that you've got these three production hubs, that the new merge co has the capacity to add an entirely new hub, or do you think it's more around digesting what you've got?

And I think you've famously said that you want to have as many assets that you can read a bedtime story too. So seven assets, but you've only got three hubs.

Can you just talk about that?

Three hubs and two management teams. Look it's fair to say that the combined skill-set is extraordinary.

I can't emphasize that enough, that was one of the biggest reasons to put the assets and the claims together is it's just nothing we couldn't – can and can't do, and we've got capacity and bank strength. And as you articulated, we've got three hubs.

Look, we'll always look at stuff in the future, but it's such an awesome opportunity and organic growth at the moment. We've got our claims pumped up, the plans implies, I'm getting full buy-in on that.

So that's where our focus is really are concentrated. And that's where we're going to get our best return to shareholders and best return on invested capital.

Okay. Now, that's great.

And just a final one from me, just in terms of the 10-year outlook on the synergies, you've already sort of dangled the carrot in front saying that there is potential upside to the synergies given material flows. Can you just talk through sort of how you anticipate that AUD200 million to AUD250 million per year over the 10 years to average?

So I'm assuming a lot of that is going to be front-ended given the corporate synergies? And then you'll probably have a lull and then a lot of the operational stuff, will you back end dated?

Is that a fair way to look at it from a modeling perspective as you merge the company?

Yes. I think it is – its Ryan, Sophie.

I think it is obviously the tax depends on where the value is allocated to assets and their lives. So probably that one's probably more advertised over, sort of evenly to 10 years, but how you described it?

How well would expect it as well?

Okay. That's great.

Thanks guys. I'll leave it there.

Thanks, Sophie.

Hi. First question is just regarding the hedge book, I mean, it seems like over the past 12 months or so Northern Star in particular has been trying to deliver quite aggressively into the hedge book and reduce that.

And obviously it needed to be put in place as part of the transaction to buy the Super Pit for both parties. Just wondering if there might be a movement in the hedge policy towards going to less hedging and just having more exposure to the gold price now that, you are going to be net cash and your debt's being paid down?

Yes, good question Dan. So we've always had a policy and articulated all the way through.

We only hedge for a couple of reasons and that's when we're transacting, we're building or we're taking on debt? It's finance policy for eight, nine years now.

And hence, as you said, we took – we wrote our hedge book buying Carosue Dam in particular taking on a large chunk of debt and protecting that capital and that investment to shareholders. So we've always done that, but – and so we're really at the top end of our policy 12 plus months ago.

So we're back well and truly in our policy ranges of what we're historically said and we do like to be probably the bottom end of our policy inheriting Saracen's hedge book, which is a lot higher than our normal policy. So combined entity, we're probably sitting back in the middle.

So it is – I will always look at stuff when we're deploying capital. We want to protect the return to that capital because the capital one investing across our asset base, we're very fortunate to have very long life assets with huge reserves.

So we are deploying capital into things like KCGM in Fimiston and other areas. We do want to protect that investment because we want to get a return on that to two, three, four years out.

So it'll be a case by case scenario. But when we look at our exposure to the spot price, and this has come off a little bit in the last three months, but no one is delivering into an average of the spot price across Australia right now.

We're dealing with 2,400 gold prices, have a look at around the quarterlies. People are delivering at 2,200, 2,300 when you're adding the hedges.

So Northern Star is in a great position to still capitalize and get maximum exposure for investors to the current higher gold price.

Alright. Thank you for that.

Next question is on tax and merger and implementation and accounting. Just wondering if you could clarify, if you know when you go ahead and book the Saracen assets for tax purposes into the Northern Star accounts.

The value of the Saracen assets is that done with the Northern Star share price at the announcement of the deal or the implementation day, which is going to be Friday. Because obviously there's a big difference between those two numbers, which will go to the final tax synergy number?

Thank you.

Yes. Daniel, its Ryan.

Good question. So it'll happen on the 12th to say; Friday.

Okay. And could I just clarify that the stamp duty comments earlier, I might had a little bit of interference as I was listening on, you don't know the number clearly yet, that's being finalized, but you said it would be less than a number.

Could you just clarify what that number was?

AUD300 million – less than AUD300 million.

Less than AUD300 million.

That's probably going to be, depending on the value. So depending on our share price and that on Friday, and then we have to do the work around, what assets are doable or not, it's going to be something like maybe 280 – AUD280 million at this stage, but yes depending on share price on Friday, it'll change value, but something like that as we speak now.

Okay. And I wasn't sure whether you said you were going to expense or capitalize that, I would've thought maybe you'd capitalize that into the balance sheet?

It's expensive, the transaction costs.

Ryan that I imagine you'd pull out from underlying earnings when you're reporting in June, as you've sort of done with the transaction costs and impairments?

That's right Dan.

Okay. Well, thank you very much for answering my questions.

Thanks, Dan.

Thanks. Today's results from both companies demonstrate clearly the high quality of the world scale gold mining company we have formed.

This business is in absolutely superb shape on every level and the merger paves the way for it to be even better. It will deliver efficiencies, synergies, and scale while maintaining our superior financial returns and a growth outlook, which stands in stark contrast in most of our peers.

On that note, you'll be delighted to hear that this is my last Investor Call as a Northern Star Executive. In future you'll be treated to Raleigh's expert commentary along with those of our Chief Executive Offices, Stuart Tonkin; CFO, Morgan Ball and other key members of our management team.

Thanks very much for putting up with my briefings all these years. I've thoroughly enjoyed it, all the best.