Northern Star seals global gold major status with Hemi buy
Northern Star Resources’ (ASX: NST) A$5 billion ($3.3bn) acquisition of developer De Grey Mining (ASX: DEG) could take the growing gold producer’s annual production to as high as three million ounces per year.
Newmont Corporation’s (NYSE: NEM) takeover of Australia’s Newcrest Mining left Northern Star as the largest gold miner on the Australian Stock Exchange (ASX) by a considerable margin, with its market capitalization recently surpassing A$20 billion ($13m).
On Monday, Northern Star announced the friendly scrip takeover of De Grey, owner of the large undeveloped Hemi gold project in Western Australia’s Pilbara region.
Managing director Stuart Tonkin said it was rare to be able to present such a compelling transaction.
“It cements Northern Star’s position as a global gold leader,” he noted. “The pro-forma entity remains a simple business – one commodity, two low-risk jurisdictions – and with the addition of De Grey’s Hemi project, four high-quality production centres.”
De Grey shareholders will receive 0.119 of a Northern Star share for each share held, representing a 37.1% premium to De Grey’s last closing price of A$1.52 per share on Friday.
Tonkin said the acquisition would have no impact on the company’s dividend policy, which is to pay out 20-30% of cash earnings.
‘Truly’ world class
De Grey shares were trading at just A5c in December 2019 when the company announced the first results from the Hemi discovery.
In the five years since then, Hemi has grown to a resource of 13.6 million ounces of gold at 1.4 grams per tonne, making it Australia’s largest gold discovery so far this century.
The September 2023 definitive feasibility study outlined an open pit operation to produce an average 553,000 ounces per annum (ozpa) over the first five years and 530,000ozpa over the first 10 years at all-in sustaining costs (AISC) of A$1,200-A$1,300 an ounce.
The 10 million tonne per annum plant (Mtpa), which will include an 800,000tpa pressure oxidation circuit, will be built with the potential to be scaled to 15Mtpa.
The DFS returned a post-tax net present value of A$2.9 billion and internal rate of return of 36%, based on a gold price of A$2,700/oz. ($1,752/oz). The current spot price is more than A$4,000/oz ($2,596/oz).
Capital costs were forecast at A$1.3 billion. De Grey raised A$600 million in May and is close to finalizing a A$1 billion senior debt facility with A$130 million overrun facility.
Hemi complementary
Northern Star has been focused on organic growth, mainly the A$1.5 billion plant expansion at KCGM in Kalgoorlie.
The doubling of plant capacity at the asset, also known as the Super Pit, will increase production to 900,000ozpa, which would make it the largest gold operation in Australia and the fourth largest globally.
Tonkin said the company’s strong cashflow generation, which totalled more than A$2 billion in the 12 months to June 30, 2024, would allow Northern Star to pursue the KCGM expansion and Hemi development concurrently.
“KCGM expansion and Hemi represent two of the world’s most exciting gold development projects,” Tonkin said.
Commissioning of the KCGM expansion is due to begin in the 2026 financial year, while Hemi is on track to start production in 2027.
“We expect the complementary timelines between KCGM and Hemi to drive development efficiencies and the integration of De Grey’s team into Northern Star will also ensure continued development momentum and the sharing of Hemi knowledge,” Tonkin said.
Northern Star expects to produce 1.65-1.8Moz of gold in the 2025 financial year, increasing to 2Moz once the KCGM expansion is complete.
The addition of Hemi would take production in the 2029 financial year to at least 2.5Mozpa.
RBC Capital Markets forecasts Northern Star’s production to reach closer to 3Mozpa, giving the company “more global relevance”.
Risks remain
The size and scale of Hemi brings execution risk, particularly in WA, where major projects have been hit by capital overruns and a shortage of skills in recent years.
A key risk is permitting. While Hemi has a granted mining license, state and federal approvals remain outstanding.
De Grey managing director Glenn Jardine said there would be an update on the parallel processes in January, but it was a case of “so far, so good” on both.
Tonkin said the company didn’t consider Hemi to have any comparison to other recent federal decisions, referring to the recent controversy over Regis Resources’ (ASX: RRL) McPhillamys development.
“There’s been great work to date, and good engagement with regulators and all stakeholders,” he said.
“Very, very happy with what’s been done there. And there’s been, in our view, no showstopper, red flag issues to be concerned about.”
Northern Star’s development skills were also questioned, given the company has largely grown via acquisition and has never built a large-scale greenfields project.
Tonkin dismissed the suggestion the company wasn’t a developer.
“We have good depth of building stuff. It’s what we do,” he said. “Our history is M&A. We got into jurisdictions at a level, renovated assets whilst we were operating them, and expanded them and brought them into a new life.”
RBC said the premium being paid by Northern Star was appropriate given the risks, both real and perceived.
“In our view, Northern Star has a good operating track record, strong technical expertise, a strong balance sheet and is cashflow generative. This should help allay fears of those risks,” analyst Alex Barkley said.
Hemi upside
A July scoping study into Hemi’s regional deposits indicated the potential to increase the project’s production to roughly 700,000ozpa from year four of the mine life.
De Grey has also been working on conceptual studies into potential underground production at Hemi, which is due for release before the end of the year.
The broader Mallina gold project, which hosts Hemi, spans for 150km east-west and 100km north-south.
Jardine said the company was excited about the regional exploration potential.
“We are aware that there are Hemi-style intrusions on that package and the company still has a lot of work to do following that up,” he said.
Tonkin said the company did not need to include the upside in the deal.
“Glenn’s effectively got a plant that’s capable of doing 15Mtpa, will be built to 10Mtpa, and the exploration upside, the underground opportunities, these are all things that will come in time,” he said.
“And all I’d ask investors and analysts today is you don’t have to look at much more than the bones of the DFS and the foundation quality of the asset – it’s there. We don’t stand still. We get the base case operating, and then we continually look for opportunities to generate greater returns.”
Chance of an interloper?
Analysts questioned the timing of the deal and whether it was driven by competing corporate interest.
Hemi’s scale means it had long been touted as a takeover target and has often been linked to gold majors including Newmont, Barrick Gold (TSX: ABX) and Agnico Eagle Mines (TSX: AEM).
In late September, The Australian reported De Grey had received a takeover proposal from Agnico Eagle. De Grey said at the time that the report was incorrect and dismissed it as “pure speculation”.
On Monday, Jardine said there had been no formal process. “We’ve obviously spoken with a range of parties over a range of things over a long period of time, but to be clear, we haven’t been running a sale process.”
One shareholder staying quiet on its intentions is Gold Road Resources (ASX: GOR), which holds 17% of De Grey.
Jardine described Gold Road as supportive.
“De Grey’s relationship with Gold Road is arm’s length and as a major shareholder. Gold Road is aware of the transaction, and obviously it will be up to them to consider their approach from here,” he said.
RBC expects Gold Road to accept the bid.
“While Gold Road may prefer a deal with a greater cash component, Northern Star’s ASX listing still would offer Gold Road and its shareholders a liquid realization of value,” Barkley said.
Bell Potter Securities analyst David Coates suggested Gold Road may hold out for a higher offer.
“While the implied valuation of De Grey is solid, we would not rule out a competing bid from one of the world’s largest gold producers (Gold Fields, Barrick, Newmont),” he said.
“We have long said ‘this is an asset the world’s largest gold miners can’t afford not to own’.”