Northern Dynasty Minerals Appears Underpriced

Jul.31.07 | About: Northern Dynasty (NAK)

So who lost a lot of money this past Friday? Or even Monday, though the market was up about 93 points today?

I am sure many of us did, but I can guarantee the people who have owned Northern Dynasty (NYSEMKT:NAK), has had nothing but a big smile on their face. Northern Dynasty Minerals is a Canadian based mineral company who engages in exploration of copper, gold, and molybdenum in Alaska. The company has ‘The Pebble Project’ which has not been fully explored but continues to confirm ‘that it is potentially amenable to high volume, underground mining.’

With that said, Rio Tinto, a 92.24 billion dollar mineral company based on its market cap, has positioned themselves the max amount in Northern Dynasty due to legal agreement threshold. Now, why would a company position themselves into a small mineral company like Northern Dynasty?

Well, I have two explanations behind this:

  • Potential buy-out
  • Stock is priced cheaper than its true value

For starters, Rio Tinto taking an approximately 20% stake into Northern Dynasty proves the validity behind Northern Dynasty exploration within the Pebbles region and the true value with their minerals.

Now, some may look at their balance sheet and say what is the underlying value? Their underlying value lies in the minerals that they own.

  • 18.8 billion pounds of copper @ $0.05/lb (conservatively) = $94 million
  • 31.3 million ounces of gold @ $80/oz (conservatively) = $2.5 billion
  • 993 million pounds of molybdenum @ $0.02/lb (conservatively) = $19.86 million

The combined value of this is approximately $3.6 billion and the market cap is $1.39 billion value. Without even including the implied resources which has not been discovered as they are still exploring, the company is worth way more than their market value. With a $3.6 billion approximately true value / 99.3 million shares outstanding calculates into an approximate $39 dollar stock price. At the current price of about $15 dollars that is about a 160% increase if it is held long term. Now, let us say it is bought out at what people are speculating, $25. It still leaves you with a nifty profit.

Update: Northern Dynasty Minerals has about a $60 million in liabilities. Therefore the “true value” (I am using this term loosely, as I think it is valued higher) is 3.54 billion / 99.3 million, which is approximately $35 dollar stock price.