The Pebble Mine, a massive copper-gold-molybdenum-silver deposit in Southwest Alaska, might never give up any of its treasure. Joint owners Northern Dynasty Minerals (NYSEMKT:NAK) and Anglo American (OTCPK:AAUKY), collectively known as Pebble Limited Partners, are under siege by a variety of opponents against the project. Environmental concerns over Iliamna Lake and the Bristol Bay watershed, which supports some 80 million sockeye salmon, has received national and even international attention.
Nine Alaskan tribes, citing section 404(c) of the Clean Water Act, petitioned the U.S. Environmental Protection Agency to pre-empt the Pebble Mine by prohibiting or restricting mining in the Bristol Bay watershed. The Clean Water Act allows the EPA to prohibit or restrict a proposed activity where it is likely to cause "unacceptable adverse effects" on ecosystems. But the EPA has seldom resorted to this authority, granting only twelve similar petitions in the past 40 years.
With controversy surrounding the project, Pebble Partnership planning was subject to an EPA watershed assessment before the permitting process. Normally, the assessment takes place after the permits are submitted. A revised agency study that found construction of a large mine near the Bristol Bay watershed could have deleterious effects on 80 miles of streams and 4,800 acres of wetlands, even without a mine process accident. The EPA plans to release a final report sometime this year.
The Pebble group's response has been robust, issuing studies and a 205-page response to the EPA draft water assessment. Vancouver-based Northern Dynasty President & CEO Ronald Thiessen called the EPA's draft report "a cynical effort to manipulate public perception about a project." Northern Dynasty's counter-report slammed the water assessment, claiming that it lacks scientific credibility, does not account for modern engineering standards, is heavily influenced by information supplied by special interests, and disputing the EPA's "unfounded conclusion that mitigation for potential fish habitat impacts associated with Pebble is not possible."
Despite Pebble's protests, the native tribes' request to invoke section 404(c) is supported by a wide variety of stakeholders in the region, including commercial and recreational fishermen, businessmen, developers, hunters and conservationists, and even further afield by Anglo investors and jewelry company Tiffany & Co. (NYSE:TIF) The clamor has prompted some Alaskans, who might normally have disdain for federal involvement, to support the EPA's conclusions.
High commodity prices over the past decade, combined with increased transnational investment and consolidation by mining companies, encouraged the trend away from rules-based agreements to relations-based business. Given shocking track records of some companies in previous eras, it is not terribly surprising that resource nationalism has become one of the greater risks to transnational mining interests. Resource nationalism does not necessarily imply outright expropriation. It can include simple expressions of dissatisfaction and public campaigns against mining interests. The trend has been less about expropriation and more about the level of state or indigenous involvement in each venture.
In this context, some see the Pebble mine as a fight between communities and foreign powers seeking to extract American wealth. Much has been made about the foreign ownership, particularly mining giants Anglo American and Rio Tinto (NYSE:RIO), a 19-percent holder of Northern Dynasty. Both Anglo and Rio carry the heavy baggage of colonial legacy, environmental damage and social disruption. All companies involved should recognize by now the need to develop their relational business better and understand the culture and politics of their jurisdictions, even in those considered "safe".
These jurisdictions go far beyond Southwest Alaska, as Washington politicians have entered the fray. Alaska Senator Lisa Murkowski, who does not support the EPA veto, recently wrote of Alaskans' "anxiety, frustration and confusion ... rather than optimism" over any benefits the project could bring. The reason the EPA stepped in, she claims, was on account of the vacuum Pebble created by procrastinating submission of development plans and applications for permits. Northern Dynasty started the permitting process in November 2004, expecting to complete it in 2005. Pebble Partnership began the process of permitting again in 2008, promising a complete plan and permit application in 2010, but it chose to delay the process. The group hopes to have a new project in the permitting process this year, but the exact plans are not finished.
A number lawmakers are taking sides regarding the project. With the EPA positioning itself to exercise rarely-used powers to halt the Pebble project without giving developers the chance to have their plans considered under the current process, the stage is set for a fight that could have broad implications for environmental policy in the United States. Five Republican Senators have questioned the EPA's motives and warned of the precedent in a letter to Ken Kopocis, nominee for assistant administrator for EPA Office of Water. An equal number of opponents citing environmental concerns, all West Coast Democrats, have weighed in with a letter to President Obama, pleading for the EPA to pull the plug on the project.
Whether or not investors would gamble on an EPA ruling, there are still questions regarding the potential rewards for Northern Dynasty's venture. Its own preliminary assessment estimates that a 45-year case yields $2.4 billion post-tax NPV at a seven-percent discount rate. That appears attractive, but what justification is there for only a seven-percent discount rate? For a project of this scale and as divisive as it is, certainly a higher rate, perhaps even in the teens, would be a more accurate representation of the risk. Northern Dynasty calculated the impact of various rates in the following table:
It is interesting to note that the highest rate they assumed is only ten percent. Rewards drop rapidly beyond this discount figure.
Even without the controversy, an investment in Northern Dynasty would be speculative at this point. But given the negative, widespread publicity that this project has received, rightly or wrongly, entering a position with Northern Dynasty would be in search of a long, long shot. The United States is not as safe a jurisdiction as some might like to believe.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.