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Why Northern Star Resources Is a Buy

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·5 min read
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Gold decreased slightly on Jan. 28 as it lost 0.4% from the previous day, closing at $1,580 per troy ounce on the London bullion market. The price was hit by a U.S.-listed stocks rebound following Monday's market sell-off.

However, the overall trend in the precious metal is undeniably positive as it is up 3% so far this year and gained nearly 12% from the cumulative average of $1,392.60 for 2019, driven by a low yielding environment and heightened uncertainty in global financial markets due to trade conflicts.

Gold outlook

Low yield rates make gold look more appealing than bonds and other fixed-income securities, while uncertainty drives high net worth individuals towards gold as they seek to shield the value of their assets against negative effects from increased volatility.

As the above-listed factors will continue to work as catalysts in the subsequent months as well, gold is expected to continue to rise, possibly hitting $1,650 per troy ounce before the end of the first half of 2020.

To give a boost to the economy and prolong the expansion phase of the business cycle, global monetary authorities will likely keep interest rates unchanged and may even lower them further.

The U.S. Federal Reserve is scheduled to meet on Jan. 30. Last Friday, the European Central Bank confirmed the prime rate at 0%, the marginal lending facility rate at 0.25% and the deposit rate at -0.50%.

Northern Star Resources Limited

Investors who are interested not only in protecting the value of their assets but also in making impressive returns out of the next rally in the price of gold may want to consider increasing their holdings in Northern Star Resources Ltd. (NESRF).

Northern Star Resources Limited, an Australian gold properties miner, explorer and developer, is poised to beat both the gold mining industry and the overall market.

In the past year, the share price of Northern Star climbed nearly 40% to $8.70 at close on Tuesday for a market capitalization of $6.45 billion, topping the VanEck Vectors Gold Miners exchange-traded funds (GDX) and the S&P 500 by about 10% and 20%, respectively. The VanEck Vectors Gold Miners ETF is the benchmark for the gold industry.

The Australian gold operator mines the rare earth metal from its Jundee Gold Mine and Kalgoorlie Gold Mines, both located in Western Australia, and from its Pogo Gold Mine in Alaska.

Kalgoorlie includes a 50% interest stake in Australia's largest open-pit gold mine, which is called "the Super Pit", which Northern Star acquired from Newmont Gold Corp (NEM) for about $800 million. It operates the mine in a joint venture with Saracen Mineral Holdings Limited (SCEXF).

On Jan. 29, the miner issued operating results for the quarter ended Dec. 30, 2019, posting a 2% year-over-year growth in gold sold to 214,635 ounces (up from 210,561 ounces) at an all-in sustain cost of $971 per ounce (down 1% from the prior-year quarter).

Northern Star Resources reported a robust 10% year-over-year increase in the gold output to 234,428 ounces in the last quarter of 2019, up from 231,829 ounces in the same quarter of 2018, as a result of strong operations throughout the entire portfolio of mineral activities.

The existing assets base puts the Australian gold operator on the right path to hit 920,000 to 1,040,000 ounces of gold produced in full-year 2020 (up 105-133% from full 2019) at an all-in sustain cost of about $837 to $905 per ounce. As a result, it is expected to generate tremendous amounts of free cash flow.

As of Dec. 30, 2019, the balance sheet had approximately $977 million in cash on hand, bullion and short-term investments and nearly $350 million in a corporate loan, which was drawn to fund the acquisition of the 50% stake in the Kalgoorlie Super Pit.

Since the preconditions for successful investment are strong, I would recommend adding shares of Northern Star Resources, even though the stock may appear a bit expensive. It currently trades above the 200-, 100- and 50-day simple moving average lines.

Wall Street recommends an overweight rating on this stock with an average target price of $11.69 per share.

The 52-week range is $5.64 to $9.91. The stock has a price-book ratio of 7.28 compared to the industry median of 1.54 and an enterprise value-EBITDA ratio of 19.2 compared to the industry median of 9.05.

The 14-day relative strength indicator of 66 tells that the stock is neither overbought nor oversold.

Disclosure: I have no positions in any securities mentioned.

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This article first appeared on GuruFocus.