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A copper play that has extreme upside potential! Northern Dynasty (TSX:NDM) or (NYSE AMEX: NAK)

|Includes:Northern Dynasty Minerals Ltd (NAK)

Everyone I know is always looking for or talking about that exploration company that is going to find the next mother lode. We all want to find that mining investment that is going to jump 1000% in the next 3 months, we have to be realistic, especially when exploration companies have a success rate of less than one percent. I wish I could be the one to pick the next Red Lake or Grasberg, but the chances of that happening are one and a hundred (I like to give myself better odds than most). What my goal with this website is to find a proven deposits that have the greatest possibility of becoming a mine in the near future and that is where Northern Dynasty (TSX:NDM) comes in. Of all the deposits I have done research on Northern Dynasty (TSX:NDM) has the largest proven reserves, let me put it this way, if you take the reserves of the largest deposit I have written about and multiple it by more than ten you will get a deposit the size of Northern Dynasty’s Pebble Project. At the same time the companies market cap and share price reflect a large part of that value, but there is still a lot of room for upswing. Especially when gold companies like Seabridge and Detour have stock values that reflect 100% of the gold value in their deposits and Seabridge has not even started fully developing its project.

Company and Management (10/10)

After looking at the team running Northern Dynasty it looks like it is stacked with a lot of mining heavy hitters. A lot of people inside and outside of the mining industry have never heard of Hunter Dickinson and that is the way they like it. Hunter Dickinson is a behind the scenes company and they have been responsible for a few major mining projects in production and on the way to production. Robert Dickinson the Chairman of Hunter Dickinson Inc is also is the Executive Chairman of Northern Dynasty Minerals Ltd. Wait it gets better, the Pebble Partnership is led by some of Alaska’s most respected resource development professionals including CEO John Shively, former Commissioner of the Alaska Department of Natural Resources. Another key figure and director is Stephen Scott. Scott is currently General Manager Commercial, Rio Tinto Exploration, Project Generation Group, a position that he has held since 2005. Wondering why Rio Tinto has a seat on the board, well not too long ago Rio Tinto invested $200 million to purchase 19.8% of Northern Dynasty’s shares and guess who owns another 11%, Mitsubishi Corp. 

On a side not, it is worth noting that Hunter Dickinson is not one hundred percent successful with all the projects they develop, but below is figure showing all the projects they have developed or had varies parts in developing.

Pebble Deposit (10/10)

The Pebble deposit comprises 5.94 billion tonnes of measured and indicated resource with 55 billion lb copper, 67 million oz of gold and 3.3 billion lb molybdenum. On top of the measured and indicated, the deposit holds an additional 4.84 billion tonnes of inferred resources containing 26 billion lb copper, 40 million oz gold and 2.3 billion lb molybdenum. The Reserves like this are unheard of for an undeveloped mine, I have never seen an undeveloped deposit this large other then the oilsands!

Mining and Permitting in Alaska (5/10)

The one thing that leaves me a little worried about the future of this project is the underground dislike of the project from NGOs. Some environmentalists and locals are concerned that a mine could poses a significant and unacceptable risk to downstream fish stocks. Several prominent jewelers have announced a pledge not to buy gold from the Pebble mine if it is built.

The Pebble Project has been a major issue in Alaska politics since the mid 2000s. A 2006 poll reported 28% of Alaskans in favor of and 53% opposed to Pebble. Another poll in 2006 reported 45% of Alaskans in favor and 31% in opposition. A poll of Bristol Bay residents reported 20% in favor and 71% opposed. Fifty-seven percent of Alaskan voters in a 2008 statewide election voted against a ballot measure that would have essentially outlawed mine development at Pebble, and perhaps elsewhere in Alaska.

When has there been a mining project where everyone supported its development? The answer is never, any mining project is going to run into someone or somebody that does not want to see it go forward. The key is to get the local community involved in the development and make sure you have the government’s blessing. Northern Dynasty is working on both right now, but they believe that the mine can be developed and operated without significantly harming Bristol Bay area fish. Lastly, the proposal has strong support amongst state-wide elected officials in Alaska!

Financial (10/10)

There are very few deposits the size of Northern Dynasty’s Pebble Project that are still undeveloped. The Pebble Project has the potential to produce up to one quarter of America’s domestic copper supply for more than 50 years.

In July 2007, Northern Dynasty and Anglo American plc entered into a 50:50 partnership to develop a modern, long life mine at Pebble. Under the terms of the agreement, Anglo American is required to fund US$1.425 to $1.5 billion in project costs to retain its interest, then all costs will be split 50:50.

After estimating the NPV of the Pebble Project with current metal prices, copper prices have the greatest effect on the projects financials. I left out the current silver prices (30$/oz) to counter the poor USD to CAD exchange rate. North Dynasty shares trade at approximately 10 CAD/Share and a one billion dollar market cap. This undervalues the company by at least ten times if you look at current metal prices.

Financial Analyses Using Varying Metal Prices - Case 1 (100,000 tpd)
Metal Prices IRR NPV@ 0% NPV@ 5%
Copper Gold Silver Molybdenum (%) (Billion $) (Billion $)
$/lb $/oz $/oz $/lb      
0.85 350 5 5 10.1 2.242 0.462
0.95 395 5 5 15.3 4.073 1.047
1 350 5 6 15.9 4.367 1.123
1 400 5 6 18 5.148 1.376
1.25 415 7 15 33 12.215 3.511
3.5 1350 7 15 100%   +20
Notes: All currency amounts are in 2004 US dollars. Analyses are on a pre-tax, 100% equity financed basis.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NAK over the next 72 hours.
Stocks: NAK