17/05/2013 - 11:02

Controlled risk taking reaps rewards for Northern Star

17/05/2013 - 11:02

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Controlled risk taking reaps rewards for Northern Star

NORTHERN Star Resources was better placed than most to ride out last month’s sharp drop in the gold price to less than $1,400 an ounce.

With cash costs significantly lower than many of its peers, Northern Star has continued to increase production without too much pressure on its finances.

Conversely, other gold juniors have been forced to make tough decisions, including completely halting projects and reducing board numbers as they seek to rein-in spending in the short term.

While Northern Star’s high-grade asset and low cash costs give it an advantage, managing director Bill Beament told Business News the miner’s other strengths were its ability to take calculated risks and apply prudent cost-cutting measures.

Northern Star last week released drilling results that indicate a likely increase in the resource at its Paulsens mine in the west Pilbara.

Results from drilling on the periphery of the deposit mined by previous owner Intrepid Mines indicate rock containing extremely high-grade mineralisation – an enticing find given no exploration was undertaken on the so-called ‘host rock’ because it was thought to be unmineralised.

“Like a lot of things, people just get their blinkers on and just look at what’s in front of them and the ore body that they’re mining, without stepping back and having a look at the macro picture,” Mr Beament said.

In contrast, Mr Beament said Northern Star had committed to taking risks in exploratory drilling.

“We’ve been willing to take a risk on drilling over the course of the last three years, and those results are showing up now,” he said.

“We always focus on the bottom line – we want as much profit out of the operation as we can and we fit everything into accordance with that – but you’ve got to take those risks.”

The recent find has proved the value of Northern Star’s calculated risk-taking; the drilling on three new sources of mineralisation has helped take the mine’s resource back to where it was before the current mine began production in 2005.

Northern Star is expecting to produce between 100,000 and 115,000 ounces of gold this year – moving it into the ranks of the mid-tier miners.

The high-grade mineralisation uncovered by the recent exploration is a factor Northern Star has worked with previously.

“Obviously we’ve got grade on our side,” Mr Beament said. “But we do mine it very efficiently.”

Northern Star’s drive for efficiency began well before any signals of a downturn in the mining sector as a whole, let alone the gold sector.

“We did cost-cutting exercises pretty much two years ago. I think we were a fair way in front of the industry on that,” Mr Beament said.

“We went top to bottom all through our business and others are only starting to do that now, whereas maybe it should have been done a while ago.”

Part of that cost cutting involved establishing an in-house mining division so Northern Star became owner-operator. Previously, Barminco had been contracted for the mining.

“The mining is half our cost base and that’s been the real jewel in our crown; that mining services division which is outperforming what contractors are doing,” Mr Beament said.

The cost cutting continued this year even while the gold price was still high, and was revisited when the drop came.

Mr Beament said Northern Star would continue to trim unnecessary costs and bolster is cash balance through production. It already has 18 months worth of material stockpiled, protecting it somewhat from any future falls in the gold price.

Northern Star made $43 million profit in the first half of this financial year and had $50 million cash in the bank at the end of December.

It was that comfortable standing which enabled Northern Star to take risks and continue exploring, according to Mr Beament.

Mr Beament said the industry had reacted quickly to the drop in the gold, with contractors volunteering to reduce their prices. However labour costs was the one area where the high cost base remained.

“There are two ways of cutting costs when it comes to labour; one is to cut people out and the second is to cut people’s wages,” he said.

“A lot of service providers are taking pay cuts; it happened in iron ore and it’s happening in nickel. So if the gold prices hangs pretty low, then don’t be surprised if it doesn’t go through the gold sector as well.”

Northern Star was already anticipating a reduction in labour costs of about 20 per cent due to the easing market and an increase in the number of people looking for work.

Mr Beament said all parties needed to become more cost efficient if the gold sector was to be successful in the future and attract investors.

“The gold industry needs to make money, not just one mine or Northern Star. We need multiple mines, multiple people across the gold sector making consistent money,” he said.

“That means they have to lower their costs, and then once we demonstrate profitably in that industry then that’s when the opportunity for good sentiment will come back into the sector.”

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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