At time of writing, the share price of Northern Star Resources Ltd [ASX:NST] is down 7.55%, trading at $11.45.
Like many other gold stocks, the Northern Star share price has been on a strong run this year as markets get choppier and the fear factor has driven the gold price up:
With the gold price sitting at US$1538 today, we look at its annual results, the details of Northern Star’s takeover bid for Echo Resources Ltd [ASX:EAR], and its outlook going forward.
Highlights from Northern Star’s results
- EBITDA up 8% to $154.7 million
- Final dividend up 50% to 7.5 cents per share
- Operating mine cash flow up 24% to $587.6 million
Northern Star did however record a 20% lower statutory profit after tax than last year.
These mixed results could be a factor in today’s downturn.
Another factor could be investor sentiment for their takeover bid for Echo Resources Ltd [ASX:EAR].
The company has moved on the exploration company and their Yandal gold project which is located about 400kms north of Kalgoorlie in WA’s northern goldfields.
The project is close to Northern Star’s Jundee operation.
The $193 million proposed takeover is a cash offer at 33 cents a share which represents a 39.4% premium on Echo’s Volume Weighted Average price on August 19.
In today’s announcement, Victor Rajasooriar, Managing Director and Chief Executive Officer of Echo said this of the bid:
‘The Offer reflects the strategic nature of Echo’s Yandal Gold Project which has a unique combination of mineralisation, untested exploration upside, established processing infrastructure at Bronzewing and a detailed Feasibility Study.’
As result, Echo Resources shareholders will be happy, but after today’s share price movement Northern Star shareholders may be less enamoured with the deal.
Outlook for Northern Star Resources (ASX: NST)
Northern Star also has the Pogo project in the works, which is slated to produce 200,000–240,000oz at an AISC of US$850–925/oz in FY20.
So the company has been investing heavily in its future production capacity.
But without knowing how long it would take Yandal to come into production, there is an element of risk in the acquisition.
Namely, the gold price might have receded by the time it comes online.
Gold is known for its tendency to rise prior to an economic slump, but like any investment, it too can become collateral damage in the aftermath of a sharp downturn as markets recover.
As you can see the gold price in US dollar terms peaked in 2011, around three years after the GFC.
Just a note of caution on gold stocks.
As opposed to what some may view as fire and forget stocks, they don’t usually pay hefty dividends and need to be monitored a bit more.
Gold stocks were hammered in 2008 along with many other equities:
With all this being said, The Rum Rebellion remains bullish on gold in the short term as a host of geopolitical factors point to further upside.
You can access our free report on our favourite two gold stocks on the ASX here.
If history is to repeat, then physical gold may be more resistant to a market downturn compared to gold stocks. You can watch the full video of our Editor Greg Canavan’s interview with the Perth Mint CEO here.
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