If you were like most investors last week looking at the mining sector, you wondered what could have caused Northern Dynasty Minerals (NAK) shares to tank. No doubt you have discovered by now that Kerrisdale Capital Management, a professional short selling firm, decided to place a short bet on the stock.
Kerrisdale Capital Specifically Wrote an Article Trying to Sink Northern Dynasty Minerals for Profit.
Kerrisdale at one point had $500 million in working capital (now down to $250 million) and was reported to have $100 million in the bank to bet against a single stock. It's own legal disclosure states that they "stand to realize gains in the event that the price of the stock decreases" and that "data and other information are not warranted as to completeness or accuracy".
Is NAK the stock with $100 million against it? No, short interest is a paltry 2% of the float, yet almost 1.2 million shares were added short in the last 2 weeks. Quite convenient in terms of the timing of such a short and distort attack. Time will tell after the next reporting period as to if those shares are added to, but one can assume a short squeeze is coming given a Scott Pruitt confirmation today by the senate. NDM has issued their comprehensive response to the report today. In Fact, TD securities also refuted the short seller report, upgrading its view on NAK to a Speculative Buy from Hold. The CEO of NDM has said that they are considering legal action against the hedge fund and have tasked their lawyers with looking into both regulatory and legal avenues.
After having phone conversations with some contacts in the mining industry myself since that article was released, it is clear investors should still be excited about the Pebble Project. One Analyst who with connections to Rio Tinto told me that morning
I was surprised at the hit piece published today. None of my friends in the industry can corroborate Kerrisdale's information, it appears to have been made up.
It is not my position to ascertain credibility, so I will let the reader decide for themselves. An insider at Anglo American who requested not to be named, but was personally involved with the Pebble Project told me
This article is laughable. We pulled out because of the political implications of the EPA trying to shut down the project before any permits had been applied for, and because of mineral prices. Our balance sheet was hurt globally due to the drop in commodity prices and we decided it was best to part ways with Northern Dynasty...".
This is just a snippet of what the source talked about, but his statement was confirmed Friday morning in Northern Dynasty's official response, noting that Anglo had significant capital constraints at that time, and the new CEO decided to go in a different direction. Claims of NDM trying to drive down costs make no sense, given Anglo was the one who was contractually obligated to pump in another billion dollars, and NDM had limited exposure to rising costs given the structure of the deal. Anglo would have been the company trying to get the best bang for its buck during construction, not Northern Dynasty. NDM would likely want the best technology money could buy given that it did not have to pay out the cash, while Anglo would have been trying to cheap out and cut costs at every turn. The short seller article offers the exact opposite view of reality. One can judge the validity of their claims based simply upon their concerns over unpaved roads. Alaska is permafrost that far north, and paved roads would crack and be destroyed under such conditions due to freeze/thaw cycles, much like in Russia. There is a reason there are few paved roads that far north. A true "engineer" involved in such a large scale project would be well versed in facts like these. Some sections of the Alaska Highway, much further south, cost $22,900 a year per km just in repair costs due to the melting permafrost.
Northern Dynasty's key asset, the low-grade Pebble deposit, is commercially viable based on legally required public disclosures.
Legal Concerns Unfounded
Ah yes, public disclosures. Something that legally one must provide lest they be sued by investors that have lost millions. Northern Dynasty has provided such disclosures throughout the history of the Pebble Mine.
Currently, Pebble and the EPA are engaging in legal mediation.
They expect that the Trump administration, and Pruitt at the EPA, will quickly reverse the agency's course and allow the company to apply for an Army Corps of Engineers permit. Bristol Bay opponents of the project, including Kerrisdale's short bet, are "disappointed with what we think is coming down the pipe" from the EPA under the Trump administration, said Alannah Hurley, executive director of the United Tribes of Bristol Bay.
Straight from the largest opposition, a statement showing such low confidence in stopping the mine from being constructed, implies EPA approval is all but assured. The legal case cited in a previous SA article has no bearing on this case. The Supreme Court simply declined to review the case, meaning a Trump supreme court could in fact review and overturn the decision of the lower court. But it won't have to because the permit process will have been completed, and after Trump's first nomination goes through,, the Supreme Court will favor Republicans 5-4. Trump could see as many as 3 nominations should he be president long enough, creating a heavily leaning Republican majority, and allowing any EPA veto in a democratic government to be squashed as quickly as it is issued (especially if said veto puts a halt to 3% of the Alaska economy overnight).
One commenter named on yesterdays hit piece wrote:
The point I would make is that the EPA cannot simple use the statute to withdraw a permit arbitrarily, only if by demonstrating that discharge would be harmful. In the Mingo Logan case, there were de facto adverse effects because the EPA could refer to the impact of other "mountaintop removal, valley dump" coal mines. In theory Pebble could have a very thorough water treatment for all discharge during and post mining.
The commenter is correct in that Pebble is not a coal mine, nor mountain top removal mine. A brand new case would thus have to be made against the mine which the supreme court would easily overturn if a veto were placed on NDM. Once the permit is approved, and it will be, it's clear sailing for the Pebble Mine. In addition, with the purge of environmental activists from the EPA, and with the current lawsuit going to remediation and due to be solved within 75 days, regulatory problems are a thing of the past.
Pruitt and Myron Ebell have been strong supporters of the Pebble Project and the thousands of jobs the mine will add to the Alaska Economy. Environmental activists have been the loudest in the room over the past 5 years, like a single man in a crowd with a megaphone, but now that law and order have been re-established under a Trump administration, the mine can be judged on its own merits. Do short sellers really think that Northern Dynasty would defraud its shareholders by withholding information? If this unsubstantiated rumor were true, NDM would be easily bankrupted by class action suits. No executive team would be that dumb. And no mining giant would have joined the project in the first place if the economic viability was that poor. By the time Anglo American pulled out, gold had dropped over 25% in the 2 years prior (while it has gained 20% in the last year and seems to have started into a new bull market), copper has gained 35% in the last year and a half, and it is NDM's largest asset at the Pebble Mine.
Economics
There is no question that the Pebble Partnership dissolved purely on an economic basis. Not due to NPV, but due to mineral prices. Minerals contained within the mine began a bear market trend in 2011, just as the EPA was trying to lower the hammer on the project preemptively. Mining companies had enough to worry about trying to keep themselves from going bankrupt, let alone investing hundreds of millions in a mine a government agency wanted to stop. Fast forward 6 years and the EPA will have been effectively told to work only under the law by Pruitt, Pebble is attracting new partners behind the scenes, and mineral prices have begun entering a new bull market. Virtually all the hard work has already been done. All that remains is dotting some I's and crossing some T's and Northern Dynasty will be approved to begin construction.
Northern Dynasty's preliminary assessment indicated that Pebble's initial capital cost would be only $4.7 billion. That is the publicly available figure. My sources told me that other partners were in the same ballpark, and $13 billion was never even on their radar.
For the Pebble Project, the 45-year Reference Case in their released documents yields a 14.2% pre-tax IRR, a 6.2-year payback on initial capital investment of $4.7 billion and a $6.1 billion pre-tax NPV at a 7% discount rate and long-term metal prices. They've already taken into account a drop in metal prices from 2011 when the report was written. At those prices, they anticipated a near 24% IRR. At a higher construction cost, the payback period would simply be longer. With a lifetime of the mine of likely greater than 120 years(perhaps as long as 150 years), a few extra billion is not a large impediment to opening the mine. How short sellers can declare "no economic value" and not take into account a 3% boost in Alaska's GDP one will never know. If those claims were true, Anglo would have sued Northern Dynasty to recoup some or all of the $500,000,000 it spent on the project. Sadly, short hedge funds still holding puts in the stock will likely be squeezed out of their position as more and more good news is released for the Pebble Project.
If the permitting process doesn't hit any snags, then Northern Dynasty Minerals and its future partner(s) will be able to begin developing Pebble sometime around mid-2021. The potential is massive, comprising an estimated:
- 70 million ounces of gold totaling 133.75 billion in revenue.
- 81.5 billion tons of copper totaling 220 billion in revenue.
- 3.4 billion pounds of molybdenum totaling 23.5 billion in revenue.
- 514 million ounces of silver totaling roughly 9 billion in revenue.
Partner Pullouts
It is interesting that Teck Resources was mentioned. Why did Teck sell their ownership of the Pebble Project? First, in 2001 when it was sold, copper prices were a much smaller figure of 80 cents per pound. They are now over 3 times that amount. In addition, Teck did limited exploration of the area, finding only 1 billion pounds of copper, and never having discovered the Pebble West deposit. Since that time, NDM has discovered over 80 billion more pounds of copper an over 8000% increase in mineral reserves. In addition, a corporate merger was initiated in 2001, meaning the 2 companies, Teck and Cominco, joined together.
The Pebble Project, having been owned by Teck since 1988 with only limited exploration, was clearly too large of a project for them to handle. Given their poor effort and low expenditure in exploring the deposit, finding only 1/85 billion tons of resources in the ground, it was obvious they had neither the expertise or the money to develop what they thought was a rather small deposit of copper. Any large company would have done the same and liquidated its holdings for the maximum amount of cash or stock that it could get from the Pebble Project at that time, given how small of a deposit it was in an extremely remote area with little access. Northern Dynasty Minerals took a chance on it and was rewarded with one of the largest deposits ever found. Teck must be regretting their decision to sell the property in 2001. Why would they ever want to keep 4-5% of profits from a mine their best engineers estimated had only 1 billion pounds of resources and a copper price that was 1/3rd as high as it is now? They wouldn't. Hence the cash sale as fast as they could get it. The "bonanza" was only discovered AFTER Teck sold the mine. They estimated 10 billion in minerals when there was in fact close to 400 billion, and could be as high as a trillion depending on mineral prices and yet to be discovered reserves.
In addressing concerns of Northern Dynasty Minerals selling the project, one can easily read between the lines to see what was taking place back then.
The Alaska Journal of Commerce wrote:
Since the Feb. 23 release of a preliminary assessment of Pebble's value conducted for Northern Dynasty that ruffled feathers with partner Anglo American Plc of London, the Vancouver-based junior mining company has been on an aggressive sales push touting the prospect.
Except shorts neglect to mention NDM was looking to add partners throughout the EPA battle, not sell the property to one. The sales pitch quote was referring to selling ownership in the project in 2011, when the EPAs opposition was well known, and NDM was likely aware of rumors behind the scenes of its partners desires to pull out. At the same time, gold prices were hitting record highs, and NDM's share price was close to $21. Any company in the same position would likely put out some feelers just to see if there was interest in hopes of cashing in. Their sentiment quickly changed from selling to holding the entire property, and looking for new partners, just as Northern Dynasty has always stated. All public information states this. It simply failed to gain new partners due to the bear market in mineral prices, quickly changing to a bull market in 2016, and because of the toxic EPA situation which will soon be remedied.
Why did Anglo American pull out? Shorts failed to mention Anglo was in the midst of a stock price that fell almost 50% since its 2011 peak, and was at risk of insolvency. It had to liquidate assets wholesale for pennies on the dollar simply to stay afloat. For the mining giant, Pebble represented 500 million in cash outflows with another billion to go, at a time when it had to fix its balance sheet (that its still working on now) while facing EPA legal challenges from all sides. The Pebble Project still represented a pretty low value of its portfolio of holdings(500 million in outflows on a $71 billion dollar balance sheet), and thus the company decided to pull out.
Why did Rio Tinto pull out? They had a tiny fraction of ownership ($16 million at the time), low enough that a charity tax break was better for them than selling the stock on the market. In addition, pension funds were pressuring management to pull out given political issues.
Why did Mitsubishi pull out? Was it for reasons related to the lack of rare earth elements in the deposit? They invest heavily even now in REEs, given China's monopoly on rare earths. No, copper smelting was the largest attraction. Mitsubishi was anticipating the closure of one of its sources of copper in BC, the Huckleberry property, originally scheduled to be closed in 2010. They only in 2016 finally closed production, meaning Mitsubishi had a source of copper long after it anticipated it would. Owning a tiny fraction of the Pebble Project was thus not necessary, since they could get the copper elsewhere. Agreements are also in place for copper from Highland Valley owned by Teck. Owner of the copper smelting group in Japan, when asked why he chose to obtain copper resources from BC, stated:
Canada's biggest advantage is stability. "In B.C., the political risk is great!" enthuses Tarumi, meaning that it's almost non-existent -- a major consideration when it comes to investing in a copper mine.
So there you have it. Clearly Mitsubishi withdrew simply based on politics stirred up by the EPA.
Anglo didn't conclude the economic value of the project was low, but that it was too uncertain given its own balance sheet. When you have shareholders to satisfy, you don't go and spend another billion on a mine the EPA was trying to veto. The EPA nightmare initiated by the Obama administration was killing both companies in public relations. Anglo was FORCED to divest its share of the pebble project, among many other assets, lest they go bankrupt. Even now they are pulling out of projects globally simply to stay afloat. They lost 2.12 a share last year and the share price is down over $2000 from its peak in 2011. If you were Anglo, would you be spending money on exploratory mines with a financial situation like that, in 2013, when mineral prices were continuing to decline with no end in sight? During a one in a generation bear market in commodities? "Economics" were correct, but Anglo meant the entire mining sector, not the Pebble Project in particular.
The Pebble Mine will be approved before Trump ever leaves office.
While Alaska Natives have mixed views about the mine, it was said that an EPA veto "defies the American way." In Alaska, the EPA is already getting cleaned up.
Scott Pruitt is days from being sworn in as head of the EPA, and has always been a vocal supporter of the Pebble Project. There is a mountain of evidence, not only that Kerrisdale is wrong in stating the Pruitt may only "entertain" the idea of removing the veto, but that the mine will pass through without a hitch. He's championed regulation rollbacks, especially at the EPA, meaning the regulatory nightmare described by short sellers is unfounded.
No Threat of Veto
The mine is going to be approved within the 4-8 years Trump is in office, assuming he holds on for another term. Not only do past surveys have tainted results from activists trying to influence the native population and virtually write all opposition aside from the residents signature at the bottom of the letters, but after having been approved, no state legislature would take the political blowback of losing thousands of jobs and cutting 3% off the state GDP simply based on public optics. Optics that will quickly change once the Pebble Mine has its plan in place, construction starts, and those same Native Americans that opposed the project are making thousands of dollars in good paying, hard working American jobs working for Northern Dynasty. Do shorts really believe Alaska, in a period of low growth worldwide, would simply remove billions in economic activity simply because of a change in administration? If the mine gets built, it WILL stay operational, without fear of vetoes. The legal precedent will have been set with the current case against the EPA. No threat of veto will exist in a few months.
Why Delay Permits
The permit process had been delayed over and over again, not only due to EPA battles (you can't apply for a permit with legal action pending, any corporate lawyer would tell you that) but Northern Dynasty continued to expand its resource discovery on a year to year basis. From 2001-2004, the resource quadrupled to 4 billion pounds. With a larger deposit comes a larger mine footprint. Why start the permit process on a mining plan too small to accommodate the site you intend to build? NDM had to wait to apply for permits simply because it was growing at an exponential rate. In addition, the Permit Process will cost millions of dollars, expenses NDM could not afford without a partner. Given their partners pulled out, one cannot expect them to begin the permit process prematurely. Delays only gave them more time to hone their pre-assessment plan.
The Pebble mine is projected to employ 15,000 workers, more than the 14,000 fisherman currently employed in Bristol Bay, offering salaries higher than those fisherman currently make, while still protecting the watershed that the Salmon currently inhabit.
Short sellers like to tout opposition to the mine, but 236,000 comments the EPA received about the mine during its public request for comments were in support of the mine. Almost all the comments urging the EPA to block the mine have been generated by major environmental groups, with large budgets for public outreach, and not by local Alaska residents who are simply looking for good paying jobs. These comments against the mine are based upon using the clean water act to veto the mine, when a plan to protect those very water resources had not been released. For all the short sellers know, NDM could be planning to build steel holding tanks where the waste runoff never even touches the soil. Such an extreme example is provided only to point out that the key fact is that they just don't know, and for that reason the EPA veto will be overturned.
I am writing to voice my strong opposition to the EPA's draft watershed assessment for the vast Bristol Bay region of Alaska because it sets a dangerous precedent, is wholly unnecessary, and relies on dubious source material from biased anti-mining organizations and scientists that recently admitted to falsifying reports submitted in legal proceedings,
said one comment to the EPA. Nobody disputes that the permit process will be a long one, but unnamed former EPA sources who have recently lost their jobs due to political bias, certainly have no credibility regarding how long the process of permits would take. Especially given they have not yet obtained the relevant documents NDM is working on prior to even applying. The EPA is said to have looked to stop mine construction even as early as 2010 according to the Kerrisdale article. Given these were public rumors, it is no coincidence that major mining partners pulled out before an official assessment and veto was released by the EPA. All of the large mining companies employ lobbyists who are made aware of upcoming information that may threaten those companies they are employed by.
Myron Ebell, who headed Resourceful Earth for CEI, and is now the head of the EPA transition team for the trump administration, even launched an initiative in 2010 in support of the mine after it noticed "every natural resource project was attracting at least one national campaign" against it. If a supporter of the mine is in charge of determining the staff that will provide regulatory approval for that mine, it's pretty clear that the mine will be approved.
For a mine that costs sub $5 billion to construct (As of 2011), $386 billion in minerals (un-discounted revenue) ensures the project IS financially viable. This figure was $270 billion just a few short years ago. Exploration will likely yield even further increases in mineral reserves. And that's with today's prices. If, as expected, the bull market continues, this revenue figure could double. As could the deposit estimates. This could easily be a $600 billion dollar mine(again, un-discounted revenue). Shorts fail to realize that construction costs and financial viability do not scale on a dollar for dollar basis, due to the massive economic deposits held under the ground in Alaska. Construction costs are likely only 2% or less of the total revenue of the mine over its lifetime.
$5 billion will still require Northern Dynasty to find a large backer to construct the mine, and as less and less political hurdles lie ahead of the company, an investment for a partner becomes more attractive. Their recent round of financing should last them until the permit process starts, at which point a larger partner will need to have signed up. They have already acquired 2 junior mining companies who have experience in obtaining financing. It is quite possible that any deal for the Pebble Project will be similar to the one signed with Anglo, whereas any partner or consortium wishing to obtain equity percentages in NDM will need to spend $X before they are entitled to that equity share. Anglo's figure was $1.5 billion, and having fallen around $900 million short at the time they pulled out, were unable to acquire 50% of the project. I won't speculate as to share dilution in the future, which is a possibility, but the latest round of financing has been fully priced in by shareholders.
When Seabridge gold is mentioned as the largest reserve by shorts, they are referring to its gold reserves (not copper) and the market cap is small given limited exploration and no economic basis or ability for the company to bring its gold mine to production. It is much less far along in the process than Northern Dynasty Minerals is, and NDM focuses primarily on its copper reserves at the Pebble Project, not gold.
Red Tape Being Cleared
Don't forget that Trump has issued a new executive order mandating that for every regulation added, 2 must be eliminated. This will clear up the red tape and if anything, it will be much easier to construct the mine than in any other political atmosphere. Alaska is controlled by Republicans currently, and as we've seen with Trumps nominations in the senate, Republicans will vote with each other. As long as a Republican controls Alaska, any ballot initiative created law should have virtually no impact on approval of the mine. Hillary Clinton also would likely have pushed the mine through to approval, given her past history of supporting gold mines in Haiti. A democrat in the white house is no threat to the Pebble Project.
CONCLUSION
Northern Dynasty is both economically viable and realistically approvable by the incoming EPA staff. It could hold as much as a trillion dollars worth of resources, employ thousands of Alaska residents currently in poverty, make up 3% of the Alaska GDP, operate for almost 150 years, all whilst protecting the environment in which it is constructed. Any short seller report cherry picking discredited information regarding the EPA or opposition to the mine can be taken with a grain of salt. Given the history of yesterdays hedge fund, and the article it posted which lined up perfectly with its short position, and given past examples of environmentalists and hedge funds attacking Northern Dynasty for political purposes, investors should ignore the clearly obvious attempts to hurt the mine and instead focus on the evidence that it is in fact a very valuable property destined to come to fruition. Happy trading of NDM and NAK.