Northern Star Resources Limited (ASX:NST) is an Australian gold producer. The company has recently expanded from operating one very high-grade low-cost mine producing around 80,000oz gold per annum to a business that now operates four mines with a production profile in excess of 500,000oz gold per annum.
Paulsens the original mine contains gold mined at ridiculously high grades resulting in it being very profitable.
I first researched this business in early 2012 and was immediately impressed with the CEO Mr Bill Beament. A couple of presentations watched online showed an extremely articulate and well organised individual. And the knowledge about his mine and industry was easy to see. The message presented at the time was about maintaining profitablility, spitting out cash and keeping things small and simple.
Northern Star has made four acquisitions in quick succession since the end of 2013.
- December 2013: Plutonic acquisition
- January 2014: Kundana acquistion
- January 2014: Kanowna Belle acquisition
- May 2014: Jundee acquisiton
With the acquisitons came a new message about being a ‘global mid cap miner’ that appealled to ‘international investors’. Upon reading this change of direction, what immediately stood out to me was a phrase known as the institutional imperative.
As human beings, it is easy to understand the motivations for each of us to strive for bígger, better and more. Warren Buffett coined the phrase the institutional imperative in his 1989 letter to his shareholders which explains this human desire for bigger and better. It is a motivation which is hard to avoid. However, he also warned at the same time that when it comes to operating a business, bigger is usually not better. From Warren Buffett in 1989:
“the tendency of executives ….. to (make) acquisitions (that) will materialize to soak up available funds”
Is this case any different?
In studying this business since early 2012 and then being a shareholder in varying quantities in Northern Star since June 2012 until about a month ago, this is what I see in terms of the quality of the business and its profitability.
*Forecast estimates of profitability are are subject to change on a daily/weekly basis.
In short, the maths suggests for the foreseeable future that a bigger business in this case does not produce higher profits or a better quality business.
For now, the market appears to agree with my view about the effects of the institutional imperative being at play.
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Northern Star Resources has been an excellent gold mining business run by an intelligent manager. I do wonder if the company has bitten off a little more than it can chew with four acquistions in quick succession.
This article is published by Dean Mico.
Disclosure: The Edge Fund no longer owns shares in Northern Star Resouces Limited. However, my view is that this business has been the best gold producer in Australia over recent years and if I am ever to come back looking to own shares in a gold miner in the future, Northern Star will be my first port-of-call.
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