Rating Action Overview

• Australia-based Northern Star Resources Ltd.'s status as a top-10 global gold producer with operations in low-risk countries and the company's strong operating cash flow and low leverage support its credit profile.
• Northern Star's marginally higher position on the cost curve relative to peers, relatively high asset concentration, limited product breadth, and sizable capital expenditure (capex) temper these strengths.
• On March 27, 2023, S&P Global Ratings assigned its 'BBB-' long-term issuer credit rating to Northern Star. At the same time, we assigned our 'BBB-' long-term issue rating to the company's senior unsecured 10-year notes with a proposed range of US$500 million-US$600 million.
• The stable outlook reflects our expectation that Northern Star will maintain its current production levels and cost position and keep its debt-to-EBITDA ratio below 1.0x over the next 12-24 months based on robust free cash flow generation and a prudent financial policy.

Rating Action Rationale

Northern Star benefits from its midsize operating scale in countries with low jurisdictional risks, supported by organic growth and prudent acquisitions. We expect the company to increase annual production beyond 1.8 million ounces (oz) in the next two years by ramping up production at the Thunderbox mine in the Yandal production center in Western Australia and the Pogo mine in the U.S. This increase aligns with Northern Star's medium-term mine plan to progressively increase production to two million oz through internal development by fiscal 2026.

Northern Star's acquired assets in the past few years, coupled with internal growth, has lifted annual production output to 1.56 million oz in fiscal 2022 (ending 30 June). In the first six months of fiscal 2023, gold production was 764koz, up 0.2% from that in the first half of the previous fiscal year. Management expects production to be heavily weighted toward the second half of fiscal 2023, helped by the first half thunderbox mill expansion as well as the Pogo and Kalgoorlie mines.

Although we expect the company to remain acquisitive, we think it is likely to keep to its strategy of targeting assets in low-risk countries. For example, the Saracen merger completed in 2021 strengthened Northern Star's operational scale, boosting its production volume and reserves, while maintaining its asset exposure to low-risk countries. Northern Star used equity to fund the Saracen merger, acquire the remaining 50% stake in Kalgoorlie Consolidated Gold Mines (KCGM), and consolidate the Thunderbox and Carosue Dam mines.

Northern Star's higher unit cost position relative to other top production peers, asset concentration, and limited product diversification temper its business strengths. Northern Star has been hit somewhat by inflation due to high fuel and labor costs and high steel prices. Moreover, production at the Yandal and Pogo production centers dropped in the first half of fiscal 2023 due to expansion works. The company's all-in sustaining costs (AISC) spiked to A$1,766/oz in the first half of fiscal 2023 from A$1,485/oz in fiscal 2021. Nevertheless, we expect costs to ease over fiscal 2023 to an AISC of about A$1,630/oz-A$1,690/oz due to increased production in the second half of fiscal 2023 at the Thunderbox mines in Yandal, lifting ore output to 6 million tons per annum (mtpa) from 3 mtpa in fiscal 2022.

We expect the increase in production in the next few years as the company leverages its investments and this will continue to lower unit costs. While the company has some low-cost mines, its aggregate cost position is likely to remain higher than its investment-grade peers for the next two years. We attribute this variance to higher labor costs associated with operations in low-risk countries and a larger share of underground mining.

Northern Star will continue to rely heavily on its key asset, the Kalgoorlie production center, for production. The company produces more than 50% of its gold through this site, and the bulk of this is from KCGM. A high reliance on output from a cluster of mines that feed the Kalgoorlie center limits the company's operating breadth exposing the company to unexpected disruptions.

We believe Northern Star will remain a single commodity producer for at least the next two years, leaving the company more exposed to gold price cyclicality compared with peers that benefit from byproducts such as copper and silver.

Robust cash flow should support low leverage.  We forecast Northern Star's leverage will remain low despite our general price assumption that gold prices will decline in the next two years: we assume the gold price to be US$1,600 per oz for the rest of 2023 and US$1,400 per oz in 2024 onward. We expect Northern Star to generate positive free cash flow over the next two years notwithstanding high growth capex. Increased production underpins our forecast that the company will generate robust cash flow from operations of A$1.4 billion-A$1.6 billion over fiscals 2023-2025.

Accordingly, we think the company will largely internally fund capex of about A$1 billion in fiscal 2023 and A$1.2 billion in fiscal 2024. The capex mainly targets expanding operations in the Yandal, Kalgoorlie, and Pogo production centers to lift overall production up to 2 million oz a year. This is in line with the company's five-year growth strategy. High capex also includes spending for a potential KCGM project that will yield increased annual production of 100koz-200koz over the first 10 years and could lead to a $200/oz reduction in AISC on completion.

In addition to our base case capex, the prospective multi-year KCGM expansion project, which remains subject to board approval, is likely to add to capex over fiscals 2023 to 2027. We expect spending for the company's five-year growth strategy and KCGM expansion project to peak at about A$1.3 billion in fiscal 2025. Funding will be via a combination of the proceeds from its proposed US$500 million-US$600 million (A$700 million-A$800 million) senior unsecured notes issuance and internally generated cash flow. Despite the high capex outlook and our projected fall in gold prices, we expect progressively increasing volumes to generate cash flow sufficient to fund a major portion of capex along with new debt, thereby supporting our view that the company can sustain its low leverage.

We have rated Northern Star's proposed US$500 million-US$600 million 10-year notes issue 'BBB-'. The rating on the company's maiden notes issue reflects the rating on the issuer and the notes status as a senior unsecured obligation. The notes are guaranteed by its major operating subsidiaries and rank pari passu with other senior debt. The note proceeds are for general corporate purposes and will ensure the company has a sound liquidity position to fund its capex pipeline, including the KCGM expansion project.

Outlook

The stable outlook reflects our expectation that Northern Star will remain a midsize gold producer with operations in low-risk countries over the next 12-24 months. These strengths should somewhat offset the company's high cost position and asset concentration in key mines. Furthermore, we expect Northern Star to maintain a debt-to-EBITDA ratio below 1.0x based on its current low debt level and continued robust free cash flow supported by a prudent financial policy.

Downside scenario

We could downgrade Northern Star if we expect its S&P adjusted net debt-to-EBITDA ratio to be above 1.5x on a sustained basis. This could happen if: (1) profitability deteriorates; (2) capex is higher than we expect due to more aggressive growth or cost overruns at existing projects; or (3) debt increases due to acquisitions or more shareholder friendly policies.

Upside scenario

We believe an upgrade is unlikely in the next 12-24 months given Northern Star's weaker position on the cost curve and growth aspirations. Nevertheless, we could upgrade Northern Star if: (1) the company significantly improves its scale and asset diversity through organic growth or acquisitions, narrowing the scale gap with larger gold producers; (2) it can achieve a record of lowering costs, particularly during a weaker point in the price cycle; and (3) it maintains prudent financial policies, including sustaining its debt-to-EBITDA ratio below 1.0x.

Company Description

Headquartered in Australia, Northern Star is an ASX-listed gold production and exploration company with assets located in the low-sovereign risk jurisdictions of Australia and U.S. In fiscal 2022, the company produced 1.53 million ounces of gold, placing it among the top 10 gold producers globally. The company operates seven mines across three production centers: Kalgoorlie, Yandal, and Pogo. The Kalgoorlie production center is the largest asset in Northern Star's portfolio, contributing close to 60% of total production.

Our Base-Case Scenario

Assumptions

• Gold prices of US$ 1,600 per oz in 2023; and US$ 1,400 in 2024 and 2025.
• A$/US$ exchange rate of 0.66 in 2023 and 0.67 in 2024.
• Higher gold production of 1,600 koz to 1,650 koz in fiscal 2023 and 1,700 koz-1,770 koz in fiscal 2024 from 1,553 koz in FY2022.
• AISC of A$1,630/oz-A$1,690/oz in fiscal 2023, and A$1,650/oz-A$1,670/oz in fiscal 2024.
• Capex of A$1 billion to A$1.2 billion in fiscal 2023 and A$1.2 billion to A$1.3 billion 2024. We expect sizeable capex given the five-year growth strategy to increase production and the potential KCGM expansion project.
• Dividends reflecting policy of 20%-30% of the cash earnings generated for that financial year.
• Share buyback of around A$300 million in fiscal 2023.
• Debt issuance of about US$600 million;
• No material acquisitions.

Key metrics

Based on the above assumptions, we arrive at the following credit measures for fiscal years 2023 and 2024:

• Adjusted debt to EBITDA in the range of 0.6x-0.8x in 2023 and 2024; and
• FFO to debt of 32%-34% in 2023 and 33%-35% in 2024.

Liquidity

We assess Northern Star's liquidity as strong. The liquidity assessment reflects our expectation that the company's sources of liquidity will exceed uses by 1.5x over the next 24 months. We project sufficient covenant headroom for forecasted EBITDA to decline by 30% and we expect the group to retain good access to bank facilities and satisfactory standing in capital markets.

As of Dec. 31, 2022, our key assumptions for the main sources and uses of liquidity for the next 12 months are as follows:

Principal liquidity sources

• Cash and liquid investments (including gold bullion) of about A$495 million;
• Undrawn bank facilities of about A$650 million;
• Estimated cash flow funds from operations (FFO) of about A$1.2 billion to A$1.3 billion; and
• Working capital inflow of about A$100 million.

Principal liquidity uses

• Debt maturities of about A$80 million to A$90 million;
• Capex between A$1.1 billion and A$1.2 billion;
• Dividend payout in the range of 20%-30% as per company policy; and
• Share repurchase of A$174 million.

Covenants

We expect Northern Star to maintain a substantial cushion against financial covenants under its $1 billion revolving credit facility.

Environmental, Social, And Governance

ESG credit indicators: E-3, S-3, G-2

Environmental and social factors are moderately negative considerations in our credit rating analysis of Northern Star. We view Northern Star's exposure to environmental and social risks as broadly in line with those of its mining industry peers. Northern Star's significant operating breadth mitigates its risk exposure.

The company has a large presence in lower-risk countries, namely Australia and the U.S., with no exposure to high-risk jurisdictions, unlike many of its global mining peers. However, the company's mining operations have high energy and water requirements and use hazardous chemicals that are a key source of environmental risk exposure for the gold industry in general. The company has set a goal of net-zero emissions (scope 1 and 2) by 2050 and a 35% reduction in absolute Scope 1 and Scope 2 emissions by 2030 relative to a July 1, 2020, baseline. The company has devised a plan to reach its targets that relies on the mines using renewable power.

Capital structure

As of Dec. 31, 2022, Northern Star's capital structure consisted of A$297.2 million of secured asset loans and A$348 million drawn from its A$1 billion revolving credit facility.

Ratings Score Snapshot

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

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