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Caution sounded on Northern Star's 'quality' Alaskan gold mine acquisition

An Australian financial services firm has sounded caution over Northern Star Resources Ltd.'s first and therefore higher-risk overseas diversification, Alaska's Pogo underground gold mine.

Just over three months after fund managers told the ResourceStocks conference in Sydney, Australia, that it was time for the country's outperforming, cashed-up midtier gold producers to look overseas for growth, preferably in tier one jurisdictions like North America, Northern Star announced on Aug. 30 that it would buy Pogo from Sumitomo Corp. and Sumitomo Metal Mining Co. Ltd. for US$260 million.

Hartleys said in a Sept. 4 note that the acquisition aligns to Northern Star's strategy and track record of purchasing quality assets — defined as high-grade, low cost but perceived short mine life — and leveraging its underground mining expertise to successfully integrate and optimize operations, while investing in exploration to convert or extend resources to grow reserve mine life.

The acquisition is forecast to add up to 260,000 ounces to Northern Star's fiscal 2019 guidance, which has been upgraded to 850,000 ounces to 900,000 ounces at an all in sustaining cost of A$1,050/oz to A$1,150/oz, a slight rise from the previous A$1,025/oz to A$1,125/oz range.

Northern Star plans to lower unit operating costs through improved productivity and efficiencies, and Hartleys, having accordingly updated its modelling to include Pogo, now forecasts 885,000 ounces at an all in sustaining cost of A$1,148/ox in fiscal 2019, 936,000 ounces at A$1,108/oz in fiscal 2020, with potential for production to be over 1 million ounces per annum from fiscal 2021 onward.

While Hartleys called Pogo yet "another transformational acquisition" and acknowledges that Northern Star can, and has, delivered, the firm maintained its "neutral" recommendation on the miner as operational success has been wholly constrained to Australia, and Pogo "adds some complexity and additional risk."

"We worry it is priced for perfection, which could have some risks to the downside," Hartleys said, which has a target price of A$7.90 on the stock which was trading at A$8.025, having dropped more than 3.5% on Sept. 6 on the news that it was buying Coolgardie Minerals Ltd.'s first 100,000 ounces from the Geko gold mine in Western Australia.

Hartleys Resources Analyst Mike Millikan told S&P Global Market Intelligence that while Pogo is a "brilliant buy ... you can't say it's going to be as low-risk as acquiring something that sits in Western Australia," like its recent acquisitions of South Kalgoorlie in March and Jundee in July.

Canadian perspective

Toronto-based exempt market dealer Red Cloud Klondike Strike's Vice President Mining Analysis Derek Macpherson said that while Alaska can get extremely cold, buying an established asset like Pogo means the in-place operating team can handle that; plus "Canada and Australia are basically the same country," with both considered a tier one jurisdiction the latter's native title issues are similar to the former's first nations; with a similar rule of law.

With other gold producers like St Barbara Ltd. and highly-rated developers like Gold Road Resources Ltd. both saying they're looking at North America for value-accretive acquisitions, both Millikan and Macpherson believe Northern Star's transaction could start the ball rolling on more such deals.

Given that Australian gold producers were trading at 52-week highs earlier this year before both the U.S. and Australian-dollar gold prices plunged, while their Canadian counterparts were trading at 52-week lows, PCF Capital Managing Director Liam Twigger told S&P Global Market Intelligence that the North American assets would look "cheap."

"There was a bit of a run on Canadian assets in 2015 with bigger producers taking juniors out, but there are still good assets available. There aren't many 100,000 ounce-plus producers [in North America], but there are several smaller late-stage development projects that might be attractive and benefit from the Australian approach," Macpherson said.

Macpherson said there would be no need for the likes of Northern Star to dual-list in North America, as institutions are "exchange agnostic," as evidenced in U.S. funds like Black Rock International Gold Fund (12.1%) and Van Eck Associates (12.4%) which are major shareholders in the stock.

Twigger said there was plenty of precedents in companies established in one jurisdiction successfully diversifying overseas, like South African Gold Fields Ltd. entering Australia with its St Ives and Agnew acquisitions in 2001.