Thank you for standing by. Welcome to the Northern Star FY 2021 Financial Results Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question- and- answer session. If you wish to ask a question, you will need to press the star key followed by the one on your tele keypad. I would now like to hand the conference over to Mr. Stuart Tonkin, Managing Director. Please go ahead.
Good morning, and thanks for joining the Northern Star full year financial results presentation. With me on the call today is Chief Financial Officer, Morgan Ball. I would like to start by emphasizing what a pivotal year it has been for Northern Star. We have emerged from a period of significant M&A activity with an exceptional asset portfolio, which will drive sector-leading growth and financial returns. In simple terms, we have the gold inventory, which will underpin the growth outlined in our recent five-year strategy. Our focus is now on unlocking the full value of that inventory in a way which maximizes shareholder returns. This organic growth will be generated by a simplified business, utilizing the synergies of the consolidated Kalgoorlie and Yandal regions and delivery of the Pogo growth strategy. Today's results contain numerous accounting adjustments associated with the merger.
We have sought to simplify our metric of success into one key measure of cash earnings, which are a record AUD 648 million. This impressive result includes the Saracen assets from the 12th of February and was achieved at a gold price of AUD 2,277 an ounce. With current spot price more than AUD 200 an ounce above this, we are positioned well to generate cash. We emphasize in our strategy that Northern Star is a business first, and there is no better demonstration of business health than cash generation. We believe that cash earnings provides a transparent and meaningful view of our business performance, both for the past year and into the future. We have a demonstrated history of profitable organic growth and have a clear pathway to build from our current 1.6 million ounces per annum to two million ounces per annum over the next five years.
We continue to invest in exploration at our world-class assets and grow gold reserves on a per share basis. Now with KCGM under single ownership, this tier 1 asset will provide significant contribution to further reserve growth. We also have a track record of paying consistent dividends for the past 10 years. Today, we announce a new dividend policy that delivers an increased final dividend of AUD 9.5 per share, taking the full year payout to AUD 0.19 per share, fully franked. Our policy of active portfolio management, as demonstrated by the recent sale of our Kundana assets for AUD 400 million, is part of our commitment to maximizing our returns on invested capital. I extend my thanks to the Kundana team for their significant contribution to Northern Star and in supporting a smooth transition of business to Evolution Mining.
Finally, with a backdrop of sector buoyancy and labor and materials cost pressures, we have a highly capable operating team to drive productivities and deliver merger synergies to lower our all-in costs as we grow. I encourage you to take the time to review our annual report and financial results and discover the significant platform we have established to deliver sustainable shareholder returns. I would now like to pass to Morgan to discuss the financial highlights.
Thanks, Stu, and good morning to all. I will be referring to some of the slides in our presentation that was released on the ASX platform earlier this morning. Stu's already said it, but it bears repeating. FY 2021 was a transformational year for Northern Star, both corporately with the Saracen merger and financially with record production, cash flow, and profits. From a statutory accounts perspective, FY 2021 was unique given the accounting requirements in relation to the merger, which became effective from 12th of February. Whilst this year's statutory earnings have been impacted by the merger accounting, our ASX releases this morning highlight the key elements of the company's underlying performance, both for FY 2021 and on a going-forward basis. I now refer you to slide five of the presentation, which sets out the key financial highlights.
As you can see, Northern Star has once again achieved improved year-on-year financial performance in a number of key areas, namely, record revenue of AUD 2.8 billion, a 47% increase in our underlying EBITDA to AUD 1.2 billion, record cash earnings of AUD 648 million, and a record underlying NPAT of AUD 372 million, which is a 28% increase year on year. It is also pleasing to note that despite the challenges posed by COVID and the inflationary environment that we are in, we have been able to maintain good control over our costs, as reflected in the increase in our EBITDA margin.
On slide seven, we've set out the company's cash earnings for the financial year. Given that there will be an ongoing non-cash impact on the company's statutory earnings from the merger accounting adjustments, cash earnings provides a clear measure of the underlying quality of the financial performance of the business. The concept of cash earnings shows the amount of underlying earnings after claims external to Northern Star, which is available for return to shareholders, growth-related investment, and balance sheet management.
In relation to FY 2021, as you can see, we have removed specific items from our EBITDA of AUD 2.3 billion, to arrive at an underlying EBITDA of AUD 1.2 billion. In line with our definition of cash earnings, we have subtracted sustaining capital of AUD 356 million and interest in tax paid of AUD 155 million to arrive at our FY 2021 figure of AUD 648 million. Turning to slide eight. As you heard from Stu, the board has reached the decision to update the company's dividend policy from a percentage of revenue approach to a percentage of cash earnings. Under the updated policy, the company will target an annual dividend payment in the range of 20%-30% of these cash earnings.
The final dividend for the year of AUD 9.5 per share reflects approximately 31% of the cash earnings for the half. Whilst this is slightly above the top end of the range, the board was cognizant that the Saracen-related earnings were only included for four months of this period. By way of comparison, this dividend equates to 6.7% of revenue above the previous policy levels, which targeted 6% of revenue. This dividend will take the total dividend payout for the financial year to AUD 0.19 per share or AUD 221 million, which out of interest is 8% of our full-year revenue. Given the one-off accounting changes during the year, slide nine reconciles the company's statutory NPAT of AUD 1 billion to our underlying NPAT of AUD 372 million.
As you can see on the slide, a primary driver of the statutory NPAT amount is the fair value revaluation of Northern Star's existing 50% interest in KCGM. This interest was required to be revalued upon completion of the merger as a result of the company obtaining 100% control of this asset. This is accounted for by an increase in net assets on our balance sheet with a corresponding pre-tax gain of AUD 1.9 billion booked to the profit and loss, along with the corresponding non-cash deferred tax expense. On slide 10, we have summarized the major out of the ordinary items impacting this year's accounts. These include the fair value uplift in the Saracen assets and Northern Star's existing 50% share of KCGM, and also the impairment of the historical low-grade stockpiles at KCGM.
Given the investment and operational progress we have made at KCGM, we have seen a material decrease in the expected depletion of the historical stockpiles at the operation. Without any medium to long-term plans to process this contained metal, we have taken the conservative view to write the accounting value down to nil at 30 June. You will recognize slide 11 from our strategic plan presentation released in July. We have established key financial parameters that will support the company's growth strategy going forward, while maintaining a strong balance sheet and the ability to provide sustainable returns to shareholders. Following the recent sale of the Kundana assets to Evolution, we've reduced our corporate bank debt from AUD 662 million at June to AUD 262 million.
Our strong net cash position and the liquidity available through our balance sheet has the company well-placed to execute on its growth plans to lift annual production to two million ounces per annum. Finally, I would like to personally thank the Northern Star financial, commercial, and legal teams, as well as our auditor, Deloitte. This has been one of the more interesting year-ends that I've been through, purely due to the number of moving parts. Both the NST team and Deloitte have gone the extra yard to pull this all together against a tight timetable in what I believe is a transparent and professional manner. On that note, I'll pass you back to Zoe for our Q&A. Thank you.
Your first question comes from Sophie Spartalis with Bank of America. Please go ahead.
Good morning, Stu, Morgan, and team. Just a few questions from me, if I can. On the front page of the results release, you talk around having a clear pathway to two million ounces, but you also talk around this profitable growth, returns, and actively managing the portfolio. Can you elaborate on this further and I guess, just guide us as to what we should be looking for going forward, please?
Thanks, Sophie. I think that the best material, again, this is the financial results focus, but in our strategy presentations and obviously the biggest presentation, showing that five-year pathway to two million ounces, and that's without the Kundana asset's contribution. Largely that is your Yandal belt growing from sort of the 450 up to 600,000 ounces. It's growing Pogo from 200-300, and moving all of your Kalgoorlie region, primarily from KCGM. The sum of the parts there at 900,000, that takes us up to the two million ounces by FY 2026. Importantly, in that, the capital is being spent, the sort of next three years. Every year this year, net capital's AUD 570 million, steps down to AUD 425 million, and again, down in 2024.
Once that capital's spent, the all-in costs reduce as the capital washes off and the all-in sustaining costs improve on that economy scale, particularly at Yandal. They're the key highlights. Everything's in our control. We've got the team. We've got the assets. It's around now the execution part, to deliver that organic growth over the next fairly few years of that five-year strategy.
Thanks, Stuart. Just in terms of that, you've got the team, you've got the assets. I guess you also need the bums on seats. Can you just talk around of that growth capital amount, how much is protected and how much is variable in terms of open to movement given those industry pressures?
Look, probably to look at the near-term stuff, a lot of it is moving waste at KCGM. There's a lot of capital pre-strip on the southern cutback of Fimiston and the OBH to the north. That is around material movements, and it is seats in trucks. Look, that's a challenge and we've encouraged and put in promotional things to get people to Kalgoorlie and get those jobs filled. The other part is the engineering at TBO. We've got that contracted there with GR Engineering Services, an AUD 100 million contract, and handed that over for them to start that commencement of the mill expansion from three to six million tonnes. That work is contracted and underway. Look, labor pressure for the sector exists. There's probably 140,000 resource jobs for 120,000 people in the state. Without borders, that's a void of absent production activity.
We have a lot of the people in our team and in control, and we prioritize where we put those people to ensure we deliver our guidance. There's flex in our plans, but that's in our control presently.
Okay. Also part of that initial question that I asked in terms of actively managing the portfolio, can you just talk around where Paulsens sits in the portfolio and more broadly other assets that aren't in your growth outlook today, where that priority lies?
Yes, for sure. Look, when we say active portfolio management, we say we can operate three to five production centers. We've obviously got three presently. We're saying this at a 1.8 million-2.2 million ounces. You can flex up and down in how many of those assets. The divestment of Kundana means we can reapply capital into our business and reapply skills and special team skills in Kalgoorlie for greater returns. The Paulsens is not a production asset. Again, not core at the moment, but it's still on care and maintenance and able to be turned on. The other important asset, obviously, the Tanami, we've sold for a joint venture recut there with Tanami Gold and putting together the team to go forward on a 50/50 basis there that their shareholders have resolved on.
There's still plenty of pipeline, and it's important to have projects all the way up the pipeline from your greenfields development all the way through to your production. You'll see that again in our strategy highlighted in Mulroney's slides, showing that we've got all of those things in there. It's more around those that are in production. We've got the three key production centers in Kalgoorlie, Yandal and Pogo to deliver that two million ounces.
Okay, thank you. Stuart, that's awesome. Just one final question from Morgan, just in terms of the writedown of the low-grade stockpiles at KCGM, just given there was no near-term plan to process these materials. Can you just talk through that a little bit further, please?
Sure. Sophie, as you would have seen again in the strategy, excuse me, based on our actual in-pit mining, we actually are realizing a lot more tonnes and ounces than we initially forecast as we've taken on this asset. Given that, as you'd be aware, there's what we term the marginal stockpile is there, and that sort of runs at above a gram. And then there's what's called this low-grade stockpile of almost mineralized waste that sits at about 0.65 g. That's been there historically with the P-zone forever and never been touched. Eventually, at some stage, we may put it through the mill, but that's so far out, based on inventory accounting, it was appropriate that we write that stockpile only off for the year.
Okay. That's great. Thanks, guys.
Thanks, Sophie.
Thank you. Your next question comes from Daniel Morgan with Barrenjoey. Please go ahead.
Hi, Stuart and team. I refer to CapEx guidance specifically on page 13. Here it appears that CapEx is for the upcoming year, AUD 682 million growth, AUD 570 million net, which compares to the AUD 570 announced back at the strategy day. I just want to understand this a bit more. There's also a footnote there that suggests the accounting standard change in FY 2023, so this isn't going forward. Can I confirm the strategy day guidance of the FY 2023 and FY 2024 of AUD 425 million and AUD 380 million respectively is therefore both gross and net?
You sound like an accountant, Dan. You're exactly right. That's the case. Obviously, under accounting standards, we are required to reduce the capital investment in growth assets by gold that happens to be realized while we're in pre-commercial. That changes at the end of this financial year. Those numbers in the strategy day are like for like in that regard. We've taken the net number out, we've shown you a net number of gold received for this year. Going forward after this year, that's the gross number we'll spend on the capital, and the gold will hit P&L.
Okay, thank you. Could you highlight?
Dan, AUD 570 is the net number, and then in FY 2023, AUD 425 is the same. It's a gross number. AUD 380 in FY 2024 is a gross number because the accounting standard changes at the end of this year.
Okay, that's important to know. Which assets are these development receipts going to be at, and can you tell us the expected ounces and the price assumption you've used there, because obviously, the price assumption might be different?
I think we've actually got a note around the price assumption in the word release, Dan. You wouldn't have had a chance to read that yet. Obviously, that could change depending on our hedge book and the spot price, but it's roughly 50,000 ounces forecast at approximately AUD 2,240-AUD 2,250. It's predominantly out of Thunderbox underground, which will flick into commercial production during the course of this year, and Thunderbox C-zone, the C-zone pit. As Stu mentioned, we're still moving a lot of pre-commercial dirt at KCGM, so there's a bit coming out of there as well. The benefit with that is, you see us in KCGM. We were getting over 30% of the ounces from the same material, in those pre-strips. The spot being higher than that assumed price. It's actually significantly netting off to the benefit of your CapEx.
Yep. Thank you. Last question is on the dividend. You've changed the dividend policy, and now focusing on cash earnings, which take into account sustaining CapEx but not growth CapEx. Can you just talk about how you came up with this dividend policy and why you haven't done so overall free cash flow, for instance?
Yeah. Thanks, Daniel. Look, many things were considered and discussed in all the scenarios. I think the percentage of revenue has served us well over the journey while we've organically grown and invested capital to grow over the recent years, and it's worked well almost as a proxy royalty to shareholders in that regard, as a percentage of revenue. On a go-forward basis, the capital in the next few years, once that is spent, we're at that run rate of that two million ounces. It is all around the cash generation out of that portfolio and the returns to shareholders on that balanced capital management. What the difficulty, and you'll see this in these presentations in regards to merger accounting, your traditional metrics, NPAT, EBITDA, kind of get destroyed with that merger accounting assumptions in there. We've adjusted a non-GAAP measure, which is cash earnings.
You all got the definition there highlighted. We believe historically for the year and go forward, it is the best representation of the business health, in cash generation. Therefore, 20%-30% of that cash generation returned to shareholders is a great opportunity for return as a dividend. It also is higher than the previous policy.
I guess, Dan, the one thing I'd add, as opposed to free cash flow, which some of our peers do use, we do have good capital growth options in the business. We think the business underlying that can handle a good, strong, consistent dividend return to shareholders. We didn't want to penalize the dividend by removing free cash flow before we calculated the dividend. We do see that growth capital tailing off. It makes really good sense for our business.
Thank you.
Thank you. Your next question comes from Nick Evans with The Australian. Please go ahead.
G'day, guys. G'day, Stu. G'day, Morgan. Look, I've noted what you sort of said in response to the labor stuff a little early on, but I just wonder sort of what impact that's having on Pogo. I just had a quick look through the annual report, and you said that the lack of labor mobility between Australia and the U.S. was a bit of a problem. How many are you seeing sort of similar kind of skills issues within the U.S. sort of mining labor market, or is it pretty much restrained to Australia at the moment?
Yeah, good question. Look, remembering probably half our team, Pogo, are Alaskan residents and half come up from the lower 48 states. We are reliant on some expat specialist skills moving from Australia to Alaska, which is the real constraint at the moment. We're only talking about 5s and 10s. We're not talking about hundreds and thousands. The difficulty of moving labor in and out of Australia is challenging for the business at Pogo. Our team, we absolutely appreciate, they're managing to do that with longer rosters, et cetera. It doesn't appear to be that same lockdown scenario in the U.S. You've got a lot more ability to transport labor around.
All right. Thanks, guys. I'll pass it on. Thank you.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Mitch Ryan with Jefferies. Please go ahead.
Sorry, guys. I might have missed it. I just had a little audio issue, but can you just talk through that change of dividend policy, and just confirm it's share of cash earnings, and how you calculate that versus it's not operating cash flow, is it?
Mitch, we've actually, again, in the word cash earnings is the nomenclature we've used. In the Word document, you'll see we have a definition right up the front. Essentially, it's our underlying EBITDA, which is really our operational cash flow proxy. We remove tax paid and interest paid, which are obligations outside of Northern Star. That gives us a cash flow number, which we believe we should share with our shareholders. As I mentioned to Dan that.
Some companies use free cash flow, which we've said before, the dividend may take out the growth capital. We haven't done that because we're reflecting the underlying sustainable cash of this business, whereas the growth capital, discretionary is too loose a word for growth capital. Look, we've started a path, but it is something that can be turned off to some extent. We're trying to reflect the underlying sustaining cash flow of the business.
Yeah. Great. Okay. Thank you. Secondly, I guess I just note that the small write-down of exploration assets, will you assess the way that you account for exploration costs? Will you expense more rather than capitalize more going forward? Or is that just a sort of one-off?
At this stage, we'll be sticking with the existing policy of capitalizing.
Okay. Thank you. That's it for me.
Thank you. Your next question comes from Peter Kerr with the Australian Financial Review. Please go ahead.
Hi, Stu . Hi, Morgan. Thanks for your time. I'm just returning to Nick Evans's question before about the labor situation in Pogo. Thanks for the color on the sort of number of Aussies who are going there. Thinking about what the government have said in the past month or so, they've talked about tightening the ability of Australians to travel overseas. They talked about people who come here, if you come here, you have to sort of stay. It's a one-way ticket. It's not about sort of coming here for a three-week holiday and then heading back overseas. Is that sort of tightening that we've heard about in foreign travel in and out of Australia in the past month, is that gonna affect your ability to take Australian workers to Pogo?
Are you guys sort of on a different channel with that, and it's about skills, labor, and so forth?
Good question, Peter. It does impact us, we're asking for ability to move those kind of fives and tens, numbers of people who are specialist Australian skills that we need in Alaska. The important thing is we fully appreciate what the government's doing, what the state is achieving with regards to the COVID rules. We're more than open to help in managing the movement of the people and the quarantining of those staff returning into the state, work in absolute compliance with all of those health recommendations. We're not asking for special treatment. We're not asking for special exemptions. We do need, in a controlled fashion, ability to move those skills. We're not talking about pulling hundreds and thousands out of the state and its labor. We're purely talking about specialists that help us expatriate those skills to our assets.
Ultimately, the earnings come back and go to dividends, and capital into the overall business of Northern Star. I think it's not about brain drain or capital drain from the state. We just need it going forward. We're working with the whole resource sector generally. It's a special skill that's required.
Could you just tell me what are the precise sort of skills that you're needing to take from Australia to Pogo? What sort of swings are these people doing? I imagine they're not gonna be doing two weeks on, two weeks off, given the distance traveled. I imagine it's longer than that.
Look, you're right. Often, we've asked them to do sort of two months on, one month off. Some of them have done extended rosters during the last year. Some of them haven't returned for six months. It is around the layering of that and moving people each month. Look, specialist skills, when I say it might be talented development operators, jumbo operators that do our tunnel development and ground support regimes that are training North Americans with that method. It may also be technical engineers or geologists in doing some of those technical assessments or safety managers in transferring that. Now, U.S. has those skills. We're imposing, I guess, Northern Star's culture and Northern Star's strategy in regards to that. It's important for us and our business to be able to move that labor around.
Just finally, could I get your view on how WA, given most of your assets are in WA and your headquarters are there, how WA has handled COVID? It's obviously been the state in Australia with the most strict kind of border rules and so forth. Are you in the camp that feels like the approach WA has taken has been over the top? Are you in the camp that it, 18 months into this thing, it looks like it was the best strategy of all the state strategies?
Look, it's difficult to be critical on it. We've been very, very fortunate, and we've been relatively undisturbed in our operating capacity. There's been some constraints. I think the resource sector's done very well in addressing the risk and managing that risk in Western Australia, and we've been fortunate to be able to continue to operate. It sits as one of the highest operational risks presently for the import of a COVID case at a mining operation. I think that's at the forefront of everybody's view. I think WA's done well. The difficulty is when other states in the nation have the difficulty, and we feel for New South Wales. It's a challenge. We've experienced that firsthand in Alaska. That's the U.S. story all over. Again, we're in a very fortunate position in Western Australia.
I don't know how long we can maintain that locked border attitude as the globe moves on.
Beauty. Thank you.
Thank you. Your next question is a follow-up question from Nick Evans with The Australian. Please go ahead.
Good day again, guys. Newcrest, which is the sort of marginally bigger than you guys on a production basis, has early this year sort of established a Toronto listing just to try and get a bit more liquidity in the U.S. markets and perhaps a bit more familiar with U.S. investors. Given that you guys have got U.S. operations as well, have you sort of thought about doing something similar, an offshore listing, secondary listing, somewhere like Toronto or the U.S. exchange?
Thanks, Nick. Look, we probably don't want to increase the administrative burden of a dual listing. We believe that shareholders have access to us on the ASX. We have probably moved weighting from North American ownership to more domestic ownership in the last 12 months. We feel that anyone that chooses to invest in Northern Star has the ability to on the ASX. No dual listing in the near term.
Thank you. Thanks, guys.
Thank you. Your next question is another follow-up question from Daniel Morgan with Barrenjoey. Please go ahead.
Hi, Team. Everyone's shy this morning. Just wanted to ask a simple question about how you're going to report going forward. I think you were talking about reporting under the three assets, which is Kalgoorlie, Yandal, Pogo. Can you just confirm that you have definitely landed on that and the reasoning behind it?
Yeah, correct, Daniel. We'll do that. It's how the guidance is met. If you think about it, the processing plants, where the feed comes from, comes through that centralized processing plant. It gives you those production at the right cost. What you'll see in the back of the quarterlies will be the appendix pages that have the mining stats per operation, you can drill down into those. The headline group's performance will be under the hubs of Kalgoorlie, Yandal and Pogo.
Thank you very much.
Thank you. Your next question comes from Matthew Frydman with Goldman Sachs. Please go ahead.
Sure thing. Morning, Stuart and team. Just wanted to ask a quick one on the Kundana divestment, and it was probably one that was touched on briefly during the strategy day. Just wondering how much mill capacity that divestment liberates, either NST-owned or third-party mill capacity, and whether you've had a chance to think in more detail around what the options are for that freed capacity. How does that change the material flows across Kalgoorlie?
Good question. It's about one million tons per annum, and presently there's a bit of a legacy tail treatment assistance there for the next few months. Ideally, I think you've seen the neighbor do a mill expansion there to take that feed. It's one million tons per annum, and it's whether we utilize other operational low-grade stockpiles or basically feed more of Mount Charlotte material through Kanowna Belle and then put more of Fimiston material through the Fimiston plant, is ideally where we'll get to. It simplifies our business. We're able to rotate that capital back into the organic growth, and absolutely gives us milling capacity.
Okay, thanks, Stuart. Potentially those marginal tons could come from the district in the form of Mount Charlotte or other operations, which means that you can feed more KCGM stockpiles through the Fimiston Mill?
Yeah. Separate to the impairment on the marginal stockpile, we have low-grade stockpiles at KCGM, 2.9 million ounces in low-grade stockpiles at KCGM that will go through the Fimiston plant. What we've identified and already trialed is there is free milling Mount Charlotte material that doesn't have to go through the Fimiston flotation plant. It goes through Kanowna Belle, and that's what we'll truck up to Kanowna Belle.
Understood. Thanks very much, Stuart.
Thanks very much, everybody, for being on the call. I think it's clear that we have emerged from this period of M&A with an exceptional asset base, which will drive strong organic growth. This will in turn underpin our strategy of achieving superior financial results as we continue to enhance our business-first strategy. Thanks for joining us today, and have a great day.
That does conclude our conference for today. Thank you for participating. You may now disconnect.