Ground Breakers: Northern Star rebounds on plans for Super Pit mega mill

Northern Star says mill expansion could add 200,000ozpa to Super Pit output and cut up to $200/oz off costs
Study update comes after gold colleague Evolution deferred a mill expansion decision yesterday due to WA’s ultra-competitive construction market
Current 13Mtpa Fimiston Mill is now ~35 years old, with study options potentially expanding it to 24Mtpa

Experts say it’s a perfect time to buy gold, with price not far off historic highs and a heady cocktail of geopolitical risk is creating an ideal situation for bullion hoarding to flourish.

Yet the large Australian gold miners have begun to look a little stressed, with the All Ordinaries gold index down some -19.54% year to date.

Indeed, the sector has been trading downwards for the past couple of years despite the strong profitability of its major players and their continued status as dividend payers.

The big bugbear for the big precious metals producers appears to be cost.

While inflation is positive for gold, miners in the sector run on far thinner margins than massive scale operators like iron ore miners, which makes them sensitive to things like diesel, power, transport and particularly labour costs.

The big end of town hit a new nadir yesterday as Evolution Mining (ASX:EVN) lopped as much as 150,000oz off the guidance it set for FY24, and announced it would defer a decision on a plant expansion at its Mungari gold mine in WA in light of “unsustainable” boom time conditions in the State’s construction and labour market.

Investors will be hoping for better news as Australia’s second biggest gold miner Northern Star Resources (ASX:NST) progresses expansion plans at its legendary Super Pit mine in Kalgoorlie.

Shares in the $8.6 billion 1.6Mozpa gold miner, which wants to hit a 2Mozpa run rate by 2026, were up over 5% this morning.

It says it is considering a range of options to expand the Fimiston plant at KCGM, its flagship operation on Kalgoorlie’s Golden Mile where gold was discovered by Paddy Hannan, Dan Shea and Tom Flanagan way back in 1893.

Plant expansion to drive costs down, production up

Northern Star acquired half of KCGM a couple years ago before combining with fellow owner Saracen Mineral Holdings to be the first company in history to own the whole Golden Mile.

The operation is still one of Australia’s largest gold mines, but has been subdued in its output since a wall slip in 2018 which cut off large parts of the mine’s second to last cutback, the Golden Pike.

Since taking full control NST has been looking at ways to bring the mine, which includes the iconic Super Pit and the 60-year-old Mt Charlotte underground, back to its former glory.

A range of options to expand its 13Mtpa Fimiston mill were presented to investors today in an update on its pre-feasibility study, the best of which could lop $200/oz off NST’s all in sustaining cost and add 200,000ozpa to its production profile (around $500m worth of gold at current spot prices).

Three expansion options will cost NST between $440m-1.4b to pursue, including a minor bolt-on expansion to 17Mtpa, an entirely new plant with a 22Mtpa capacity or a major refurbishment to replace 70% of the plant’s components giving it a massive 24Mtpa milling throughput.

Those options contain attractive IRRs of between 16-31% at a spot price of $2600/oz, or 13-26% at $2250/oz, with a respective payback of 2-5 or 3-5 years.

Given the current construction and inflationary environment, a steady state option, keeping the mill at its current 13Mtpa throughput, could still be favoured, with Tonkin saying the company plans to increase its output at KCGM to 650,000ozpa by 2026 even without a major expansion.

“We will now embark on the final study phase to optimise the best pathway to generate superior returns for shareholders. We will not grow for growth’s sake but remain focused on the disciplined and transparent allocation of capital and a strong balance sheet,” he said.

“While we are confident and well-positioned to pursue a mill expansion at KCGM given access to a highly skilled workforce and our recent major project experience, maintaining the current 13Mtpa milling capacity is an option that remains firmly on the table.

“Regardless of the outcome of the final feasibility work to determine the most valuable option, the KCGM pathway to 650kozpa by FY26 remains unchanged, with regional synergies and production growth enabling a lower AISC position than we are achieving today.”

Costs going up

The impetus to rejig the mill at Fimiston comes off the back of exploration success from Northern Star in Kalgoorlie, that has expanded its resources to 27.4Moz, reserves to 11.9Moz and has seen NST cut the first underground portal at the pit in 25 years.

Tonkin told analysts and investors on a call the only way to meaningfully reduce the company’s processing costs was to revitalise the ageing infrastructure.

“It’s a 35-year-old plant, it’s been maintained as best it can to keep that going,” Tonkin said.

“There’s no significant material bullets of replacement costs associated in that but we budget continual replenishment in keeping the reliability in the infrastructure that’s there.

“But without replacing it, or simplifying it and making fewer, larger parts, we can’t structurally change the cost base.”

While the costs of expansions, projects and capital works in the current environment have been lit up further by Evolution’s announcement yesterday, Tonkin said NST had done a lot of work to understand the implications of the current environment.

The update comes on the back of a smaller project to double the capacity of its Thunderbox mill near Leinster from 3Mtpa to 6Mtpa.

“If you kind of took like year on year, some of the things that we bought and have used for Thunderbox can almost have double the lead time and 40% extra cost for the same thing (now),” Tonkin said.

“So that’s what’s reflected in these costs.

“(Chief technical officer) Steve (McClare) spoke to the point of on that investment decision, you can absolutely lock in and secure known lead times, known prices, and derisk those things.

“But it just it’s like you put an extension on your house and you put in a new swimming pool at the moment, you have to decide whether you want to pay that price in today’s terms, whether you think it’s going to come off.

“We’re very confident from the execution phase, that we have the depth and the capability to do it … it’s actually only about 10% of our current business’ activity.

“So relative to what we’re doing and managing every day of the week, it’s very manageable for Northern Star and the fact that it’s in our own backyard in the City of Kalgoorlie-Boulder derisks it even further.”

Northern Star is also eyeing significant emissions reductions of up to 35% by 2030, with KCGM to have up to 60% renewable power.