Northern Dynasty Minerals: Valuation Considerations

| About: Northern Dynasty (NAK)

Summary

Based on current market dynamics, I estimate a consortium partnership of $2.9 billion for 50% ownership.

I anticipate some run-up in price prior to partnership announcement, but the pre-announcement rally may be softened slightly due to the high degree of short interest.

NAK is one of the most shorted stocks on Wall Street. Short interest was approximately 34 million shares (NAK and NDM) as of October 11.

Despite the fact that daily shorts as a percentage of sales reached an all-time high of 95% on October 6, the stock rose nearly 10%.

Partnership news will likely lead to a short squeeze, and could also surprise the market with a higher buy-in than anticipated.

In fellow contributor Paul Lebo’s previous article, dated August 21, he discussed Northern Dynasty Mineral's (NAK) fundamental value proposition. Specifically, upon partner news, Lebo predicted a fair value of $6 - $9 per share based on a partnership of $2.5 to $3.0 billion for a 50% interest. Considering the fact that the prior 2007 partnership was $1.5 billion for 50% interest, and that approximately $750 million in capex was spent by the prior partner on the Pebble project from 2007 - 2013, I believe that the new partnership will be at least $2.25 billion ($1.5 bil + 0.75 bil) for a 50% interest. Further, given the start of a new commodity super cycle, as well as predictions for soaring copper prices due to increased use of electric cars, I believe that a premium will be paid for the largest undeveloped copper and gold mine in the world. As such, my best estimate is a $2.9 billion consortium partnership for a 50% ownership interest.

To provide some additional context on my thoughts on partnership, I would first note multiple references to the likelihood of a consortium of partners made by both CEO Ron Thiessen and VP of Public Affairs Doug Allen in their recent public speeches (please note this was covered by fellow contributor Lebo (Northern Dynasty Update: Partnership Appears Imminent), not to mention Pebble Partnership CEO Tom Collier’s comments during his speech at the Denver Gold Forum. While I also view Freeport (FCX), BHP Biliton (BHP), and Rio Tinto (RIO) as potential, even likely partners due to recent capital raise activities, I would also add Barrick Gold (ABX) to the list of potential partners. Barrick is a Canadian-based company that already has a large 50/50 JV project in Alaska, Donlin, and could take advantage of economies of scale as well as experience working with the State of Alaska and U.S. federal environmental authorities.

From a historic perspective, I would note that most of the gains NAK saw prior to its July 31, 2007 partnership with Anglo took place in the weeks preceding the announcement. Therefore, we could see a significant break out in the stock price even before partnership news is released. In fact, back in 2007, some 90% of the partnership gains were factored into the stock price prior to the partnership announcement. However, the situation is different in some respects today due to the high degree of shorting. For reference, below I have included the daily short volume data for the last four trading sessions:

Daily Short Volume - October 11 (StockHouse Report)

Volume

5.901

Million

Buys

2.863

Million

Sales

2.269

Million

Dark Pools

0.769

Million

Short

1.645

Million

Short as a % of Sales

72%

Shares Sold By Longs

0.624

Million

50% Sales by Longs Purchased by Shorts

0.312

Million

Short Interest Add / (Reduction)

1.333

Million

Daily Short Volume - October 10 (StockHouse Report)

Volume

2.159

Million

Buys

0.814

Million

Sales

1.020

Million

Dark Pools

0.325

Million

Short

0.572

Million

Short as a % of Sales

56%

Shares Sold By Longs

0.448

Million

50% Sales by Longs Purchased by Shorts

0.224

Million

Short Interest Add / (Reduction)

0.348

Million

Daily Short Volume - October 9 (StockHouse Report)

Volume

4.109

Million

Buys

1.989

Million

Sales

1.448

Million

Dark Pools

0.672

Million

Short

1.142

Million

Short as a % of Sales

79%

Shares Sold By Longs

0.306

Million

50% Sales by Longs Purchased by Shorts

0.153

Million

Short Interest Add / (Reduction)

0.989

Million

Daily Short Volume - October 6 (StockHouse Report)

Volume

5.946

Million

Buys

3.146

Million

Sales

1.759

Million

Dark Pools

1.041

Million

Short

1.674

Million

Short as a % of Sales

95%

Shares Sold By Longs

0.085

Million

50% Sales by Longs Purchased by Shorts

0.043

Million

Short Interest Add / (Reduction)

1.632

Million

Source: Trade Data Ihub / Short - nakedshortreport.com / FINRA

The amount of shorting seen on Friday, October 6, was the highest level of short sales as a percent of total sales that this stock has ever seen. In essence, Friday’s trading activity demonstrates that almost no longs were selling and, even with 95% of sales sold short, the stock was still up 10%. This likely signifies that the shorts are working diligently to suppress the stock price in order to protect their position. This trend continued on October 11, which saw a 1.3 million increase in short interest despite NAK notching an 8% gain. The conclusion that I draw from this data is that in recent days the stock price has continued rising despite the increase in short interest to a massive ~34 million, which shows that longs are in general no longer selling, and consequently the shorting game could be coming to an abrupt end. On October 11, the stock crossed the important $2.00 psychology threshold again and began to break out without any partnership or EPA news, furthering my viewpoint that the shorting thesis may be on life support.

NAK also released news early on October 12 regarding two key positions that were filled for the Pebble Limited Partnership (PLP). Stephen Hodgson, formerly the leader of engineering for Northern Dynasty and Hunter Dickinson Inc. has been repurposed to fill the role Senior Vice President of Engineering and Project Director. As such, he will be responsible for project design, engineering, and maybe most importantly regulatory compliance. He is aided by the new hire James Fueg, who has been named Vice President of Permitting. It seems that NAK and the Pebble Partnership are continuing to gain traction in the permitting process and have clearly demonstrated they are ready to take the next step per their additions to senior leadership. Not only do these two newly hired PLP members have extensive experience in mine engineering, resource development and the permitting process, but they also both have a long history of operations in Alaska; a key point that could help win over skeptical Alaskans as well.

Related to the long-term investor perspective, the goal of the Pebble Mine is to achieve production by early 2024. The long-term investor will ignore the daily volatility and focus on this seven-year production goal. Intermediate steps for NAK include imminent partnership announcement, permit filing by end of Q4 , and permit approval by end of 2020. I agree with the $6 - $9 price target proposed by Lebo and would argue that we will see this price range upon imminent partnership announcement. I also anticipate a rally in the final two weeks of October to coincide with the end of the comment period for the EPA lift, which is October 17th. With events such as the hiring of senior technical leadership and the de-scaling of the Pebble Project, it is likely that we could hear news regarding a consortium of partners around November 10th (close to the time NAk will be reporting earnings), if not earlier.

In conclusion, I would not be surprised to see a moderate rally prior to formal partnership announcement. However, the stock price suppression by the high short interest may mute the pre-announcement gains. Another important consideration is the potential for a consortium partnership with greater buy-in than the market expects. For these reasons, instead of a 'buy the rumor, sell the news event', any partnership news in today's marketplace may very well be a buy the rumor, buy the news event.

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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