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Edited Transcript of NST.AX earnings conference call or presentation 26-Aug-19 10:30pm GMT

Full Year 2019 Northern Star Resources Ltd Earnings Call

Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Northern Star Resources Ltd earnings conference call or presentation Monday, August 26, 2019 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ryan P. Gurner

Northern Star Resources Limited - CFO

* Stuart Peter Tonkin

Northern Star Resources Limited - CEO

* William James Beament

Northern Star Resources Limited - Executive Chairman

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Conference Call Participants

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* Daniel Morgan

UBS Investment Bank, Research Division - Director and Analyst

* Lorana Szeto

Solaris Investment Management Limited - Analyst

* Matthew Frydman

Goldman Sachs Group Inc., Research Division - Research Analyst

* Michael Slifirski

Crédit Suisse AG, Research Division - MD

* Sophie Spartalis

BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst

* Stuart McKinnon

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Northern Star's FY 2019 Financial Results. (Operator Instructions)

I would now like to hand the conference over to Mr. Bill Beament, Executive Chairman. Please go ahead.

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William James Beament, Northern Star Resources Limited - Executive Chairman [2]

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Good morning, and thanks for joining us. On the call today, we have our CEO, Stuart Tonkin; and our Chief Financial Officer, Ryan Gurner. I'll make some brief introductory statements and then hand to Ryan who will take you through the highlights of our FY 2019 results.

If we can please start by referencing Slide 3 on the ASX presentation document lodged this morning. FY '19 was another year of significant growth in numerous ways to Northern Star. And it was the right type of growth. The business was able to generate a total shareholder return of 62%, largely in part for the consistent performance of our Australian operations and some well-executed and value-accretive M&A. We declared an underlying net profit after tax of $179 million, increased our final dividend by 50% to $0.075 per share fully franked. And in the June quarter, we ended the year by generating a record level of underlying free cash flow of $104 million, which shows what our asset base is capable of delivering.

In terms of our safety environment and social outcomes, we also had a year of fantastic achievements. We saw a 45% reduction in our lost time injury frequency rate. We had no regulator or environmental incidents. We delivered $1.34 billion of economic value-add into the economies in which we operate and conducted our first stand-alone ESG road show in February this year.

During the year, we acquired the world-class Pogo mine, grew our resource base there by 31% and declared a maiden reserve of 1.5 million ounces.

I'll now turn my attention to this operation. In business, timing is everything. And I am delighted to say the timing of our Pogo acquisition is looking great. The gold price at the time of the Pogo purchase was in Australian dollar terms, AUD 1,650 an ounce. It's now around AUD 2,250 an ounce. Our decision to move immediately to implement our proven business model at Pogo, which included a $50 million investment in a new mobile fleet, change to the mining methods and extending the mine life, now also looks like ideal timing. As a result of this investment, we have increasing production and falling costs against the backdrop of a much higher gold price than at the time that investment decision was taken. All up, it proved to be a great time to acquire and invest in the Tier 1 gold mine in a Tier 1 location. With the strong progress they made at Pogo and our Australian operations just fit to maintain their excellent performance, we're on track to produce 800,000 to 900,000 ounces this financial year.

In FY 2019, we achieved an average gold sold price of AUD 1,764 an ounce. So with the stock price now around $500 an ounce higher than we received on average in the past year, the benefits of our acquisition and investment strategy are flowing through in the form of increased margins and free cash flow.

The results being generated by our investment and operation strategy at Pogo just strengthen our view that this mine is fast emerging as our flagship project. We said it would take 18 months to get right. We are well underway as shown by our guidance there for the second half of this financial year, which is 120,000 to 140,000 ounces. That puts Pogo close to historical production run rate of approximately 300,000 ounces a year.

The investment we have made in exploration at Pogo is also delivering outstanding returns. The resource now stands at nearly 6 million ounces at a grade of 9.6 grams per tonne. That's not just good, it's absolutely sensational. The production rate, the grade, the cash flow and the mine life, Pogo has it all in a Tier 1 location. And we own it, and we bought it when the gold price was $600 an ounce lower than current spot price. I'm sure you can see why we made the decision to invest $50 million. That outlay came off the financial results you see today. But it's a very small price to pay for what we believe will be a very big return.

I will now hand over to Ryan who will take you through the financial results in more detail.

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Ryan P. Gurner, Northern Star Resources Limited - CFO [3]

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Thank you, Bill. Good morning, everyone. I'll now present to you the financial results for FY '19.

Turning to Slide 8, which provides an overview of the key financial highlights achieved during FY '19, with Northern Star delivering an underlying net profit after tax of $179 million and a statutory profit after tax of $155 million; EBITDA of $480 million, which was up 8% from FY '18; strong net mine cash flow from operations of $359 million. We have declared a final FY '19 dividend of $0.075 per share fully franked, a 50% increase on FY '18 final dividend. The total payout for FY '19 is up 42% on the FY '18 dividends declared. And we remain well positioned with our strong balance sheet, which includes $361 million in cash, bullion and investments at 30 June.

Moving to Slide 9, which outlines a reconciliation of underlying net profit after tax from FY '18 to FY '19 and statutory net profit after tax. Northern Star achieved an underlying net profit after tax of $179 million for FY '19, with the main drivers of the profit result related to the transition and investment at Pogo operations and higher noncash depreciation and amortization charges relating to the acquisition of Pogo and South Kalgoorlie, which now reflects a full 12 months of ownership.

During FY '19, the company incurred $6 million in acquisition costs associated with integrating and completing the Pogo acquisition. These acquisition costs, along with further noncash items totaling $18 million, including an exploration impairment of $10 million and fair value adjustments of $8 million, gave rise to a statutory net profit after tax of $155 million.

Slide 10 highlights the key cash movements and investments made during FY '19. FY '19 was a year of significant organic and inorganic investment which included the $350 million acquisition of the Pogo gold mine in Alaska where we have just recently announced a 1.5 million ounce JORC Reserve.

In addition to Pogo, Northern Star continues to invest organically with $95 million in growth capital and $66 million in exploration invested during FY '19 to set up the business for future years. Over the past 5 years, Northern Star has invested $267 million into exploration, which has driven our resource and reserve growth significantly on a per share basis. And a total of $70 million was paid to our shareholders this year with another fully franked final dividend declared of $0.075 per share.

Turning to Slide 11. Northern Star has consistently demonstrated group EBITDA growth since 2012. The Australia operations continue to excel, recording a strong EBITDA margin of 46% in FY '19. Pogo's operating margin is expected to increase as we progress our key operational objectives during FY '20. Northern Star is focused to increase margin through productivity improvements and capture the benefits of the higher current spot gold price environment, which is currently more than $500 an ounce above the FY '19 realized price.

Slide 12 outlines the cash flow generation from the mining operations during FY '19. A total of $588 million of operating cash flow and $539 million -- $359 million, sorry, of net mine cash flow was generated from the operations in FY '19, both increases on the FY '18 results. Pogo contributed $24 million in net mine cash flow despite being in a period of transition. The strong mine cash flows generated from the operations provides the capital for further investment and return.

Over to Slide 13. Northern Star has a proud consistent history of paying dividends to its shareholders and has returned 61% of all paid-up capital in the form of a fully franked dividend. This all-time payout ratio increases to 71% after the final FY '19 declared fully franked dividend of $0.075 per share, which will be paid during the second quarter. This is in line with NST's policy of paying out 6% of revenue. If the substantially higher gold price persists throughout this financial year, then shareholders can expect further dividend growth and a higher yield.

Moving to Slide 14, which highlights Northern Star's hedge policy framework and hedge position at 30 June 2019 alongside a group of 16 ASX-listed peers. NST is well positioned against its peer group to participate in the current strong gold price environment, with NST having fewer weeks of hedge commitment and at a higher price than the peer group. Subject to the further pricing environment continuing, Northern Star's shareholders can expect to receive further return by dividends.

Slide 16 illustrates a demonstrated track record of delivering both rapid paybacks at our operations and significant reserve growth since acquisition, including Northern Star's maiden 1.5 million ounce reserve at Pogo.

On a similar theme, Slide 17 shows the impressive rise in Northern Star's JORC Reserve base to 5.4 million ounces together with the JORC Resource base of 20.8 million ounces. More importantly, Northern Star has been able to grow reserve and resources on a per share basis since 2012. This has unlocked significant value for our shareholders and has been achieved by the conviction of Northern Star's management and its Board to invest organically in exploration over many years. Whilst we can achieve these superior returns on invested exploration capital, it will continue to motivate spend inside our business.

And finally, Slide 21, which highlights the key investment projects in FY '20. $44 million developing and bringing online new mining areas at Pogo, which also includes a $7 million processing spend to increase throughput; $24 million development and infrastructure to bring Moonbeam underground online in Kalgoorlie; $37 million of exploration drill platforms at Jundee as well as setting up new mining areas; and the company plans to invest a record $76 million in exploration in FY '20 to continue this hugely successful campaign of mine life extensions at our assets. With this investment, Northern Star remains on a strong growth pathway.

With that, I will now hand over to the moderator who will open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Michael Slifirski with Crédit Suisse.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [2]

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I'm interested really in the opportunities the current gold price might present to you. You're talking about being $500 an ounce higher than what it was last year. So specifically, with respect to Paulsens, how do you think about the opportunity for restart? What would that cost you? What could the timing be? And how many ounces potentially look commercial from Paulsens? Or do you preserve it expecting that the gold price goes higher? How do you think about that, please?

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William James Beament, Northern Star Resources Limited - Executive Chairman [3]

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Yes. Thanks, Michael. It's Bill. Look, very good question. At this gold price, our whole portfolio lights up at this gold price. So yes, it's fair to say that we're very busy behind the scenes looking at all our projects, Paulsens definitely for sure. There's still some gold there at a low-cost side. We are reassessing a lot across our whole portfolio because the margins are very, very high at this current level.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [4]

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Can you sort of offer any specifics in terms of Paulsens? Given that, I guess, we know what its operating history was, what it might cost to restart it, what the timing could be and how many ounces you think could be commercial at current spot?

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William James Beament, Northern Star Resources Limited - Executive Chairman [5]

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Look, I won't get into it too much because I won't do that on a half year. We're doing technical work behind the scenes. Paulsens is very little capital to restart. But as I said, we're going through a whole lot portfolio because there is a number of opportunities across our asset base that line up at this gold price.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [6]

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Okay. And then sort of an extension that maybe you can comment. But thinking about Echo where you're a shareholder and where there is an idle mill, how do you think about the opportunity for perhaps some sort of arrangement to utilize that capacity when you're long gold and sort of short capacity?

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William James Beament, Northern Star Resources Limited - Executive Chairman [7]

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Look, we are 21% shareholder of Echo, and Echo run their own company.

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Operator [8]

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(Operator Instructions) There are no further questions. Pardon me, we do have another question. The next one comes from Stuart McKinnon with The West Australian.

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Stuart McKinnon, [9]

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Look, I don't even like talking about this, but I have to be remiss certainly not to ask. You would have heard Mark Bristow tell Bloomberg earlier this month describing Northern Star as a front-runner for what we call the Super Pit. Would you say you're just focusing there? Or have there been some discussions around that asset?

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William James Beament, Northern Star Resources Limited - Executive Chairman [10]

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Stuart, it's Bill. Can you just repeat that last part of the question? Sorry, you mumbled a bit.

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Stuart McKinnon, [11]

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Sure, sure. I'm sorry. You heard Mark Bristow, you would be aware of the comments at Bloomberg about the Super Pit, him describing Northern Star as a front-runner. Were you just focusing on that? Or have there been some discussions with the company around the health of that asset?

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William James Beament, Northern Star Resources Limited - Executive Chairman [12]

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Look, good question. Look, we will always continue to keep our eyes at the right opportunities. If a potentially suitable asset like KCGM comes up, we'll always have a look. So we always have and we will always look at opportunities. It would be remiss of us not to do otherwise. But we've always said any acquisition, we'd have to make strict investment criteria. That includes generating superior returns on capital, which are in line with the high rates we expect from our current assets. To do otherwise would destroy value for our shareholders.

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Operator [13]

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The next question comes from Lorana Szeto with Solaris Investment Management.

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Lorana Szeto, Solaris Investment Management Limited - Analyst [14]

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Just a question on -- following Michael Slifirski's question, on (inaudible) and technical changes and you're saying you're doing a lot of technical work. Does the Paulsens and perhaps some of the other older mines fall into that category? Is that the sort of work that's been done in the industry at the moment?

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William James Beament, Northern Star Resources Limited - Executive Chairman [15]

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No. Look, we've got a huge resource base, Lorana. So yes, we're just looking at those resources and those projects. And a lot of them surround our existing infrastructure as well. So we're just looking at them and rerunning numbers because there's some very attractive margins at this level.

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Operator [16]

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The next question comes from Sophie Spartalis with Bank of America Merrill Lynch.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [17]

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Just 2 questions for me. Firstly, Tanami, can we get an update there as to what you're thinking, timing, et cetera? You said that you're putting a modest amount of capital into the asset this year.

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William James Beament, Northern Star Resources Limited - Executive Chairman [18]

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Look, I won't comment too much on Tanami, to be honest. So I'll just say, look, at this current gold price, we're just reassessing the numbers and looking at that from that point of view, but that's all I can say at this point.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [19]

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Okay. I guess, Bill, you're being a little bit cagey today on the call. Is it -- do you see an appetite for divestments in this environment? You seem to be doing a lot of technical work and a lot of shoring up where the value sits in the company. Let's put price aside, but just in terms of the market at the moment, obviously there's a lot of pressure to buy things in this environment. But is it also a sellers' market as well?

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William James Beament, Northern Star Resources Limited - Executive Chairman [20]

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Look, I don't see any pressure in the market to buy stuff. That's -- I don't know where that's coming from, definitely not for us, maybe for others. We've got plenty in our portfolio to keep us busy. No, we're not shoring things up to sell them or -- I'd just -- it'd be remiss of us as executives of this company not to review our resource base at this gold price. $2,300 yesterday and $2,253 this morning, that's a fantastic price and there's huge margins to get from our portfolio.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [21]

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Okay. And then just given then the emphasis on price, just in terms of your reserve-resource calculations, what do you need to see to trigger a review of the gold price that you're using for those?

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William James Beament, Northern Star Resources Limited - Executive Chairman [22]

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Look, obviously, we just put out our resource and reserves using a reserve price of, I think, $1,500 and resource of $1,750. Look, we're not going to make wholesale changes of that. But coming into this financial year, if it's at this price, you'd have to look at some gold price assumptions provided they hang up to where they are. But I couldn't give color on where that sits. We're just looking at project by project, resource by resource at the moment and seeing what looks are very attractive at this price.

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Operator [23]

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The next question comes from Daniel Morgan with UBS.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [24]

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Just some financial questions given the financial results today. So corporate costs, stripping out sort of these one-off items such as acquisition costs or impairments, just wondering what is the run rate for corporate costs in the business going forward.

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Ryan P. Gurner, Northern Star Resources Limited - CFO [25]

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I think roughly, Daniel, it's around $50 an ounce basically is where it sits. That's all in.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [26]

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Okay. And then the balance sheet, you've got net cash. You've maintained net cash last year during an acquisition. Just wondering where you think the right level of financial liquidity sits and would you ever go to debt. Just want to know how you're thinking about that.

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Ryan P. Gurner, Northern Star Resources Limited - CFO [27]

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Well, the company has always had -- we've always generated great returns, so we've always had cash. Liquidity, we've got plenty of it at the moment. It's really when it comes to debt based on M&A, so we're not in that sphere right now. So we're generating great cash at our operations. We're giving shareholders returns. With this gold price, we're hopefully going to drive further returns. So debt is not something that we think about right now.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [28]

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And just the last question. When you do think of acquisitions, how do you think about the gold price when assessing an acquisition?

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William James Beament, Northern Star Resources Limited - Executive Chairman [29]

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Look, the gold price is the gold price at the time, so every acquisition is -- sits according to a gold price that we take. Obviously, it's elevated at the moment, but we just always use what the spot price is and assess accordingly. If you ever do an acquisition, you've seen us over the years do it, we've always been very balanced in what we've done from an equity or a cash or a debt perspective. We've done hedging at times to lock in margins and all sorts of stuff. So that's a what-if scenario.

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Operator [30]

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The next question comes from Matthew Frydman with Goldman Sachs.

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Matthew Frydman, Goldman Sachs Group Inc., Research Division - Research Analyst [31]

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We've talked a bit on the call this morning about obviously the Aussie dollar gold price strength. Can you give us a sense of what the market's toll treating is, particularly obviously around your Kalgoorlie and Jundee operations [for] third-party ore treatment? And then can you remind us whether you have any committed toll treating capacity from any third-party providers baked into your budgeting for this year?

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Stuart Peter Tonkin, Northern Star Resources Limited - CEO [32]

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Yes. Thanks, Matt. It's Stuart Tonkin. So Kalgoorlie, we've got our capacity 3.2 million. We toll treat 600,000 tonnes, which we've got committed there. There's opportunity. We're also building some stockpiles. So we have utilized our mills in the goldfields region. But at this gold price, it will be many of our peers as well looking at those options. We're also doing the contract work and looking at the reviews with Jundee and Kalgoorlie for those expansions. So as we said over the years, we invest, we build mine life, then we build production, then we're building stockpiles and we're investing in our plants. We're back to that sort of point at the moment, we're bottlenecked in the mill. And that goes to Pogo as well. So we're looking at the capital improvements to extend and expand production through those plants. So at this stage, we just want to deal with what's in our control and the capital projects required. And many talking about small investments around for good throughput gains.

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Matthew Frydman, Goldman Sachs Group Inc., Research Division - Research Analyst [33]

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Sure. If I think back to last year, you obviously ran a small amount through a third-party mill at Kalgoorlie. You also had some committed capacity at Jundee. Is it fair to say in FY '20, you range 800,000 to 900,000, that's ex any external third-party toll treating, it's purely the -- I guess the range of what you think you can do internally at the moment?

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Stuart Peter Tonkin, Northern Star Resources Limited - CEO [34]

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Yes. Talking about the delta on ex driver, that's probably correct. We had utilized that at Jundee. We utilized at [Willena] plant. So yes, that was really just to [trial through] that.

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William James Beament, Northern Star Resources Limited - Executive Chairman [35]

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Got it. Matthew, Bill, just to be clear, yes, that's internal. We like to say we do have a contract for 600,000 tonnes through our third-party mill. So it's all internal costs that committed contract for our current production guidance.

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Matthew Frydman, Goldman Sachs Group Inc., Research Division - Research Analyst [36]

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Sure. Sorry, that third party, that's through for material from Kalgoorlie. Is that correct?

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William James Beament, Northern Star Resources Limited - Executive Chairman [37]

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Yes, correct.

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Operator [38]

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That concludes the question-and-answer session. I'll now hand back to Mr. Beament for closing remarks.

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William James Beament, Northern Star Resources Limited - Executive Chairman [39]

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Last year, I said it was a great time to be a gold miner. As it turned out, it was an even better time to be buying a gold mine, especially one of the best in a Tier 1 location. Thanks to our acquisition and investment program, we are growing at a time of significantly rising gold prices. Growth is good provided it's good growth. We have always maintained that we do not target increased tonnes and production for the sake of it. Growth must deliver increased returns for shareholders. Just like our Australian assets, what we paid for Pogo and the investments we have made in it will generate strong returns for shareholders and significant benefit for all stakeholders. Thanks very much for joining us today.