Northern Dynasty Minerals: Mid-Term Election Wins Highlight The High-Risk High-Reward Opportunity

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About: Northern Dynasty Minerals Ltd (NAK)
by: Chris Katje
Summary

Election wins in both governor and voting down Ballot 1 were big positives for Northern Dynasty Minerals.

Company secures right of way access, strengthening its ability to transport to the mine.

A looming decision comes in 2019 from U.S. Army Corps Engineers.

Given peer valuations on mines, the company could be worth $1 to $10 billion.

Shares are trading with very low probability of partner or building of mine in the long term.

Northern Dynasty Minerals (NAK) and their Pebble Mine have been in the news recently thanks to several positive advancements concerning the site and the political activity in Alaska. As a result, shares of this beaten down speculative mining stock have increased 50% to current levels. Many of the risks remain when investing in Northern Dynasty Minerals. However, I believe the latest political shift, the company’s new plan, and possible 2019 catalysts offer a compelling high-risk high-reward scenario here for speculative investors.

The biggest reason for the spike in the share price was the mid-term elections. Alaska elected GOP candidate Mike Dunleavy with 52.3% of the vote. Dunleavy defeated Mark Begich, a Democrat who has been vocal about not allowing the Pebble Mine to progress. Dunleavy has come across as pro-mining and when asked about the Pebble Mine specifically, has said he wants to see permits and testing go through before making a decision.

Alaskans also voted down Ballot Measure 1, also known as Stand for Salmon. The proposal would have made it tougher for the Pebble Mine to proceed. Alaska was a big election battlefield with Pebble Mine as a key driver. More than $14 million was spent on Ballot Proposal 1 with millions more spent on the governor race. Stand for Alaska, fueled by oil and mining companies, spent more than $12 million on the election. Two gubernational candidates who opposed Pebble Mine also lost in the election.

Going forward, Dunleavy has declared that “Alaska is open for business” and “we’re going to be humming here in just a few years.” Mining and mineral development were cited as important items to the future success of Alaska. Dunleavy has already appointed a possible positive appointment in the progress of Pebble Mine. Dunleavy announced Jason Brune as his environmental conservation commissioner. Brune is a former executive director of Resource Development Council. Brune also worked in public affairs for a former Pebble Mine partner (Anglo American (OTCPK:AAUKY)).

One of the biggest positives seen for Northern Dynasty Minerals was the announcement on November 20th that it had secured right of way access to the Pebble Project. The deal comes with the Alaska Peninsula Corporation and will allow the company’s Pebble Partnership to use APC lands for construction and transportation of infrastructure. Along with the important rights to connecting land and the ability to transport future equipment, this deal also marked a good start in building relationships with Alaskan natives.

The company called this a significant milestone in the developing relationship between the Alaskan native people of the region and Pebble Partnership. Alaska Peninsula Corporation is a corporation with land holdings. The corporation has 900 shareholders, who stand to benefit with toll payments and other fees now coming from Pebble Partnership. APC will also receive preferred contractor status on any projects for the region and will be included in a profit sharing agreement.

Pebble Mine Alaska Map (Source: November Presentation)

Backing up for a minute, Pebble Mine is one of the largest undeveloped land areas containing large proven reserves of copper, gold, and molybdenum. The property was once explored by Cominco (now Teck Resources (NYSE:TECK)). In 2001, Northern Dynasty Minerals purchased the Pebble property. In 2005, the company acquired 100% of the Pebble deposit, and discovered additional reserves. The state of Alaska owns the land, which it secured in 1974 during a land exchange. The state secured the land explicitly for the mineral potential.

According to Northern Dynasty’s website, “the Pebble Project is the most significant undeveloped copper and gold resource in the world.” The company has spent $150 million on environmental and socioeconomic studies over the last 10 years. The company needs to secure permits on three levels (federal, state, local). The mine is currently being studied under the 404 Wetlands and Clean Water Act.

Here is a look at the current timeline:

Pebble Mine Timeline NAK Stock Shares (Source: November Presentation)

Northern Dynasty would like to do the following:

  • Develop Pebble Mine as an open pit mine
  • Have on and off-site infrastructure
  • 270mw power plant
  • 83-mile transportation corridor from the mine
  • Permanent year-round port facility at Cook Inlet
  • 188-mile natural gas pipeline from Kenai Peninsula to Pebble Mine

The construction will take four years to construct. The company believes the mine will operate for 20 years. Peak mining is seen at 75 million tons per year.

The amount of reserves at the Pebble territory have increased several times. In 2001, the estimate was one billion tonnes of reserves. By 2004, that figure had increased to four billion tonnes. In 2006, the figure had increased 600% from the original. By 2008, the undeveloped Pebble Mine was known as one of the world’s most important mining assets. In 2011, the estimated resources in the Pebble Mine region had increased 1000% from the original 2001 estimate.

Current estimates stand at:

Copper

Gold

Molybdenum

Silver

Measured and Indicated

57 billion pounds

71 million ounces

3.4 billion pounds

345 million ounces

Inferred

25 billion pounds

36 million ounces

2.2 billion pounds

170 million ounces

(Author Created Table, Source: November Presentation)

Palladium and rhenium also occur at the deposit.

Pebble Mine Copper and Gold Reserves Proven Inferred NAK Stock (Source: November Presentation)

Going forward, Northern Dynasty Minerals has the following as their corporate strategy:

  • Advance the environmental impact statement process
  • Advance re-positioning of the project with stakeholders
  • Re-partner: Engage a partner with the financial depth to permit, build, and operate a world-class mine at Pebble.

Putting a valuation on Northern Dynasty Minerals is extremely difficult given the huge reserves of precious metals, but also the huge uphill regulation battle currently being fought. Anglo American turned down the option to acquire a 50% stake in the Pebble Mine for $1.5 billion. That would suggest Northern Dynasty Minerals valued the mine at $3 billion at the time.

Another smaller undeveloped mine company NovaGold Resources (NG) has a $1.2 billion market capitalization. NovaGold previously had 50% interests in two large mines in similar regions. NovaGold owns 50% of Donlin Gold in Alaska with Barrick Gold (ABX). The company also held a 50% stake in Galore Creek (copper, gold, silver) in British Columbia with Teck Resources.

The company sold its 50% stake in Galore Creek to Newmont Mining (NEM) for $275 million. Nova Gold has two big differences to Northern Dynasty Minerals. They have strong partnerships on both these projects and also are further along the approval process with less of a fight from opposing parties.

For comparison sake, here is a look at the two NovaGold properties mentioned compared to Pebble Mine:

Gold

Copper

Silver

Donlin Mine

33.8 mil oz

Galore Creek

5.45 mil oz

6.8 bil pounds

102.1 mil oz

Pebble Mine

71 mil oz

57 bil pounds

345 mil oz

(Author Created Table, Sources Linked Above)

As you can see, the Pebble Mine holds some substantial deposits of gold, copper, and silver. With the Galore Creek getting a $550 million valuation in its latest sale, investors should consider how much a 50% stake in Pebble Mine could be worth to a large mining company.

Another mine to consider is Grasberg Mine in Indonesia. The mine is considered to be the largest gold and second largest copper mine in the world. Freeport-McMoran (FCX) and Rio Tinto (NYSE:RIO) were majority owners of the mine along with the Government of Indonesia. A recent sale by Rio Tinto saw the Government of Indonesia acquire 40% of the mine for $3.5 billion. Current estimates are $14 billion in reserves in the Grasberg Mine. Indonesia represented 47% of Freeport’s 2017 operating income.

I would also keep an eye on Barrick Gold as a potential partner or acquirer. The company has openly said it is looking to acquire more assets, especially in the copper and gold fields. Barrick said it wants more exposure To Canada and is looking for 3 million ounces of gold. Pebble Mine has more than enough gold and copper to get Barrick excited and also is in close proximity to Canada. Barrick also has an existing partnership in Alaska, as mentioned above.

If you are running the numbers in your head, the value of this potential mine is well north of $3 billion. In fact, at full capacity, 100% ownership of this mine could be valued between $5 and $10 billion. The risk here is of course the mine never being built and the fact that the company needs a partner to do so. The company needs to get through a few more hurdles and then find the perfect 50% partner. That 50% deal will really place a valuation on the company and its shares.

I’m willing to bet that a 50% deal is done for at least $500 million, which could lead to a valuation of $500 million to $1 billion for Northern Dynasty Minerals shares. I think that is the low end with the positive catalysts. I also think the current market capitalization of $230 million is placing around a 20% chance that this mine ever sees the light of day, which I believe is on the low side.

The company provides the following to illustrate potential share value based on the price of copper and gold.

NAK Northern Dynasty Minerals Pebble Mine Share Valuation (Source: November Presentation)

Many articles can be found online discussing the bear case for the stock and the environmental case for never allowing the mine to be built. A bearish article published here on Seeking Alpha stated shares were worthless and caused a sharp reaction from the company.

Among the biggest bear cases is the lack of a partnership for the Pebble Mine. Four large mining companies have all pulled out of partnerships despite investing millions of dollars in the project. Northern Dynasty has stated it is seeking to re-partner on the asset. With several big names out, there aren’t a ton of big mining companies left that could take on this project, but with the amount of metals available, someone has to think about taking a shot here.

  • 2011: Mitsubishi Corporation left the project.
  • 2013: Anglo American spent $600 million on the Pebble Mine. Later, the company turned down the option to acquire a 50% stake in the Pebble Mine for $1.5 billion.
  • 2014: Rio Tinto left the project.
  • 2018: First Quantum Mining leaves Pebble Mine project after investing $37.5 million. Possible concerns over intense lobbying.

Many argue about the impact to the waterways and salmon fishing industry by the mine. This remains the biggest challenge as the company faces incredible backlash and opposition. The no vote on the salmon ballot shows that the state as a whole doesn’t want to see such strict rules put in place. The deal with locals for road use also shows that some residents in the surrounding area are willing to work with the Pebble Partnership or at least profit from the results. Northern Dynasty has said the fishery is not threatened. A new smaller footprint mine has an even lower impact. In fact, around 1% of the Bristol Bay watershed is impacted by the new mine.

Pebble Mine EPA Plan NAK Northern Dynasty Minerals Pebble Mine New Plan NAK stock Northern Dynasty Minerals (Photos Source)

The mine was famously stopped by the EPA due to safety concerns. Northern Dynasty has worked with the EPA on lifting the hold due to the Clean Water Act. The EPA was expected to overturn the ruling this year, but it is still currently in limbo. Northern Dynasty needs a positive ruling in 2019 to really cement forward progress for the mine and shareholders. I love seeing this picture (above) that illustrates the smaller size scale of the mine. A look at the picture compared to the EPA rendering shows that Northern Dynasty is ready and willing to compromise to appease the EPA. The Federal Environment Impact of Pebble by the U.S. Army Corps of Engineers is expected by next spring.

Northern Dynasty has continued to say that the mine will bring jobs and revenue to the region. The company estimates 850 to 1900 mining jobs will become available. The mine will also have a $19 to $21 million estimated economic impact. The company will pay $49 to $66 million in state taxes.

Shares of Northern Dynasty Minerals took a hit and hit their 52-week low of $0.425 when First Quantum Minerals dropped out of the Pebble Mine venture. Shares have now traded between $0.425 and $2.30 over the last 52 weeks. Also consider that shares were above $3 in January 2017 and even over $20 back in 2011. The potential has always been there, but the path to success seems to get harder and harder pushing shares down.

The positives seen by the company have led to 50% gains in the last two months. I believe there are more gains here before the end of the year and all signs point to 2019 with decisions coming from studies. I would also expect additional mining companies or old ones to reconsider Pebble Mine given a possible clearer path to building.

Northern Dynasty has no debt and around 50 million (Canadian Dollars) in cash. Insiders own 10.8% of shares. Institutional investors own 30.7% of shares. The company has ample cash right now to keep the regulation and permit periods going. However, it is pretty obvious that the company needs a major partner to finance the building of the actual mine.

I recently took a small stake in Northern Dynasty Minerals. I believe the risk is worth the potential payoff if any of the catalysts hit. I would like to see a positive result of the latest study, a new partnership, or some progression on the mine prior to the 2020 elections that could see pushback on the mine progression once again. I look forward to seeing the results of the study next spring.

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.