About: Northern Star Resources Ltd is a gold production and exploration company with a resource base located in the gold regions of Western Australia and the Northern Territory. Northern Star is the third largest gold producer in Australia.

Why it is in the portfolio: With the largest gold miner in the index Newcrest Mining Ltd (NCM) looking on the expensive side we have decided to obtain the portfolio’s exposure to gold stocks which in our view tend to trade on more attractive valuations. Northern Star provides the portfolio with exposure to a gold stock on the basis that we expect gold to perform well in periods of volatility and gold stocks look reasonably attractive relative to the gold price.

Fundamentals: Northern Star Resources trades on a forward price to earnings ratio of around 19x. NST offers a fully franked dividend of around 2.7% on a 30% payout ratio and has a strong balance sheet with a net cash position.

What could go wrong: The common factors that impact the performance of resource stocks such as Northern Star Resources are the fluctuations in the commodities in which they operate (price, currency), the level of production (volume), the cost to dig the resource out of the ground (costs), and the level of capital expenditure required to establish and keep the mine(s) going (capex). In addition to the interaction between those common factors another consideration that investors must be aware of with resource stocks (particularly small resource companies) is the mine life of the mines that these companies operate. Typically, small resource stocks are dominated by a large project with a finite life-span, so they are reliant on finding “the next big thing”, this can sometimes mean as investors that any cash flows that do get extracted from a successful project end-up being ploughed back into finding and investing in the next one. Investors should therefore be wary of management’s capital allocation decisions. Mine specific risk is also typically an issue for small cap resource stocks in that any operational difficulties at their major mine can impact cash-flow. Given that Northern Star's assets are predominately located in Western Australia there may be political risk with the WA government looking to increase the royalties received from gold mining companies.