Given the explosive upwards ascent in all levels of Peabody Energy's (BTUUQ) securities, driven by the parabolic move in met coal, from the bonds to the equity, I have been asked by many Seeking Alpha readers for my next best idea. Since, they were smart enough, or lucky enough, to have maintained their conviction in the idea, many of them have profited handsomely from the Peabody Energy Chronicles. Unfortunately, your dear author here, lost his conviction and sold my bonds at the wrong time. Either way, congratulations to everyone who held their bonds and equity options. The positive perfect storm created this unbelievably lucrative opportunity. The biggest take away or lesson learned for me was the importance of properly sizing a bet, so that you aren't forced to watch the idea on a daily basis. The other lesson learned or reminder was that strong investment returns occur when you have an active imagination. Again, congratulations to everyone.
As for my next idea, I had visions of writing a John Grisham like piece, as this company has lots of controversy surrounding it, and it is a high stakes political bet. Given my lack of bandwidth and the time required to craft such a piece, I am going to take a different approach and offer a list of articles as required reading. I urge all readers to invest the time reading these articles for the back story. I would then urge readers to read articles offering other opposing perspective.
My next best speculative idea is Northern Dynasty (NYSEMKT:NAK). Northern controls the mining rights to Pebble Mine in Southwest Alaska. Due to the mine's location and remoteness, this project has faced sharp resistance from environmentalists. As I don't want to reinvent the wheel, here are the required reading articles.
Wall Street Journal Articles:
1) EPA Proposes Limits on Alaska Pebble Mine Project: published July 18, 2014
2) Exposing The EPA: published May 13, 2014
3) The Greens' Back Door At The EPA: published May 14, 2015 and written by Kim Strassel
4) The EPA's Pebble Blame Game: published May 21, 2015 and written by Kim Strassel
5) More Proof On Pebble: published October 5, 2015
Here are some great excerpts from WSJ writer, Kim Strassel's, from her piece (with links above) - The EPA's Pebble Blame Game:
The EPA has a problem: its pre-emptive veto of the Pebble Mine, a proposed project in southwest Alaska. The law says that Pebble gets to apply for permits, and the Army Corps of Engineers gets to give thumbs up or down. The EPA, a law unto itself, instead last year blocked the proposal before applications were even filed. The agency claims it got involved because of petitions from Native American tribes in 2010, and that its veto is based on "science"-a watershed assessment that purportedly shows the mine would cause environmental harm.
This column reported a week ago on EPA documents that tell a very different story. They reveal the existence of an internal EPA "options paper" that make clear the agency opposed the mine on ideological grounds and had already decided to veto it in the spring of 2010-well before it did any "science." Emails showed an EPA biologist, Phil North, working in the same time frame with an outside green activist to gin up the petitions. It's not much of a leap to suggest that the EPA encouraged the petitions so that it would have an excuse to intervene, run its science as cover, and block a project it already opposed.
This excerpt is from Kim's, The Greens' Back Door At The EPA piece:
In February 2014 the EPA took the unprecedented step of issuing a pre-emptive veto of the Pebble Mine, flouting long-standing law that gives the Army Corps of Engineers first authority over such projects. The EPA claimed it got involved in "response to petitions" in 2010 from Native American tribes. And it claimed it issued a veto because its internal watershed assessment proved the mine would do environmental harm.
The veto hit weeks after Mr. Collier took over Pebble, turning the former Clinton administration official and lawyer into a full-time EPA battler. He's filed a lawsuit questioning the EPA's veto authority; another demanding hidden EPA documents; and yet another claiming the EPA flagrantly violated a federal law requiring officials to work with outside players in a public and structured way-not in secret. He's sending info to the EPA's inspector general, who is now investigating.
The New Yorker article:
Essentially, the WSJ argues that through documents obtained through the Freedom of Information Act, senior members of the EPA wanted to kill the Pebble project in 2010. They colluded and created a strategy to work with members of anti-mining contingent and well as engaged with local constituencies that would be opposed to project. This would be a clear violation of the law and duty of this government agency. Moreover, this plotting was well ahead of its scientific review conducted by the EPA on the merits and risks of the project took place. Therefore in 2014, the EPA moved to preemptively veto the project Northern Dynasty project before they filed for permitting. Thus, the EPA wanted to preempt the Army Corps of Engineers' evaluation of the project.
Again, I urge everyone to invest the time to thoroughly read all of the required reading as well as the opposing views before they contemplate investing a dime in the stock.
Here is the link to Northern Dynasty's September 2016 slide deck.
Here are some highlights from the investor deck.
Here is the size of the asset and potential reserves.
The EPA and environmentalists create hysterical imagery suggesting that the mine is one mile from Bristol Bay and tailing will be discharged right into the Bay.
Here is more discussion on the actual size and location of the proposed mine.
Valuation: There are currently 265 million shares outstanding and warrants for another 76.8 million. So at today's price of $0.74 x 341.8 million shares, we arrive at a fully diluted market capitalization of $252 million.
So here is the catalyst. In October 2015, Northern Dynasty, merged with Cannon Point. Cannon Point is controlled by Frank Giustra and Gord Keep. Keep in mind, Frank Giustra is a close friend of Bill Clinton since 2005 (Bloomberg) and is among the largest donors to the Clinton Foundation. Anyway, given the EPA overreach, I would urge interested readers to read the two following articles for more background on Mr. Giustra and Mr. Keep.
Business builder Giustra gets back to work in the mining game: published September 22, 2015
Within the Mining.com article, Mr. Keep reveals his thesis and interest in Northern Dynasty.
Keep says there's no guarantees the EPA will settle but feels the risk is justified for the "spectacular upside potential" of one of the world's largest minerals deposits. A long term thinking major or state-supported end user may be interested in developing Pebble, Keep believes.
And that is just the outcome that Keep will be looking for. He hopes Northern Dynasty will be able to joint venture the Pebble asset favorably in the event the EPA plays ball. He is optimistic both can happen in under one year. It is also possible that a major may want to acquire the asset outright.
Anglo American had invested approx US $585 million of $1.5 billion to earn a 50% interest in Pebble from 2007-2013. It abandoned its interest in late 2013 on the back of a change in the CEO and a re-direction of priorities amid a weakening commodity price environment.
If the EPA is unable to proceed with its veto, the Army Corps of Engineers will conduct Pebble's Environmental Assessment. Keep expects their science based approach to rule favorable for the project, despite the heavy scrutiny the project will be under. Keep also understands the project has strong social support in the communities closest to it. Of the vast sums invested in Pebble to-date, approximately $150 million was spent on the multi-year Environmental Baseline Document, one of the most comprehensive of its kind in the history of the mining industry.
Concluding thoughts: Given the EPA overreach and the high likelihood that Hillary Clinton wins the presidency on November 8, 2016, perhaps there is a chance that Mr. Giustra can argue the merits of the Pebble Mine to a more objective Mrs. Clinton. We have learned that the Clinton's are more business friendly and less environmentally ideological. Moreover, if the EPA Veto is thrown out, then there is a possibility that the Army Corps of Engineers will be able to more objectively evaluate the risks and benefits to the project. At its current $252 million valuation, I would argue that the market is under appreciating the optionality, especially if the EPA Veto can be thrown out in court.
Disclosure: I am/we are long NAK.
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.
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