Northern Dynasty: A Zero Or A 4-Bagger

Summary

• Northern Dynasty's management is on the record saying they anticipate (think it is plausible) that a Final EIS and Record of Decision could be secured before the 2020 election.
• If permitted, this stock significantly re-rates, and I would argue it would fetch $1 billion ($2 per share) to $2 billion ($4 per share) in a sale.
• If Pebble were permitted, it possible that a Barrick Gold ($50 billion market capitalization) or a consortium of miners would be bidders.

Long-time readers and followers might recall my infamous piece, "A Stock Idea For An Upcoming Hillary Victory" (October 24, 2016). At the time of publication, shares of Northern Dynasty (NYSE:NAK) were completely off the radar and were trading at $0.77 apiece. I say infamous because, like so many professional pollsters, media heavyweights, coastal elites, and the like, I incorrectly assumed that Hillary would waltz to victory in November 2016. Oops, I was wrong. Miscalculating one of the biggest election upsets in U.S. Presidential history notwithstanding, it turns out that my Buy recommendation for NAK was a good one. Lo and behold, post election, shares of NAK went on an epic bull run, and eventually hit an apex of $3.41 per share during the first week of February 2017.

(Source: Yahoo Finance)

As the stock rose rapidly, it suddenly become en vogue, which often happens when you are the momentum stock darling of the moment. Well, as this supernova rally was starting to show signs of moderating, it quickly burned out when fairly well-known short-selling firm Kerrisdale Capital Management published a well-timed piece, "Northern Dynasty Minerals Ltd.: The Pebble Deposit Isn't Commercially Viable" (February 14, 2017). In the subsequent weeks, I went on a writing bender, when I morphed into "Elon Musk obsessive mode" and did a bunch of work on NAK and wrote a number of articles that were shared and published exclusively on SA. A few months later, circa May 2017, after all of the momentum had leaked from the balloon and permitting hurdles and roadblocks sudden sprang up, most likely set by a well-coordinated pack of environmental and special interest groups, I exited stage left, as I reluctantly concluded that the stock was dead money. At that time, I kind of concluded that company and stock would die on the vine, as legal fights and permitting are expensive.

I remained dormant on the name, until recently, after I kicked the dust off my research files and reopened the cold case.

Incidentally, after I got confirmation based on the price action of the strong May 5, 2020 close, I picked up a 4%-sized position in the stock at $0.67 per share. Today, the forward momentum continued with shares closing north of $0.70 apiece. Volume was brisk, at more than 5 million shares for two consecutive days now.

(Source: Yahoo Finance)

Let Me Explain Why I Got Long Shares

Northern Dynasty's management team can only be described as dogged and laser-focused on its North Star - cutting through all of the red tape and successfully getting its Pebble mine through the gauntlet of permitting hurdles. That once unthinkable task looks not only possible, but very likely.

Enclosed below, please review this slide that captures the sequence of events and illustrates that the only two remaining hurdles that separate Pebble from permitting are a Final EIS and Record of Decision. Per NAK's management, they anticipate that these final two milestones will be successfully obtained.

(Source: Northern Dynasty April 2020)

If NAK's management proves correct on both the timing as well as successfully obtains those two key items, then that would mean that the Pebble mine would be a permitted mine.

For perspective, this would be one of the world's largest and last-known greenfield deposits containing vast quantities of precious gold and copper. Per management's estimates, we are talking about the second-largest gold deposit as well as a significant copper deposit. There are also other precious metals in situ.

To advance the project to this point, NAK's management listened its critics and redesigned a project that would be smaller in size and footprint, and built with a number of enhanced environmental safeguards.

Although the size of the deposit has never been disputed, the bears always attempt to throw cold water on the bulls' case by saying the grade level is relatively low and that the site of the mine is too remote. Therefore, because of the required infrastructure needed to set up shop (in a safe manner), that somehow the mine would be uneconomic. Moreover, the environmentalists argue that, god forbid, a tailings accident in some black swan event (like an 8.0 earthquake) could lead to a crack and a leak into the waterways that could miraculously travel an inordinate distance. During this black swan event, somehow those tailing won't get diluted during their extensive journey. The environmentalists then get hyperbolic that after this 8.0 earthquake strikes, the world's greatest salmon run would be destroyed. I don't want to get into the politics of this, other than to say that this is a political lightning rod. And because this is a lightning rod, the Obama Administration imposed some unprecedented and preemptive measures to try and block the rule of law here. After a series of legal victories, those preemptive vetoes have been lifted.

Incidentally, on January 23, 2020, Ron Thiessen did a fireside chat video with Marin Katusa. If readers are curious, it might be worth the time to invest the twenty minutes to get the backstory. That said, my understanding is that Mr. Katusa is a big NAK bull and long a lot of the stock. So keep in mind that he has a bullish perspective and outlook given that he is voting with his investment dollars. On the video, Mr. Thiessen states he believes, and that it is highly plausible, that Pebble will secure the Final EIS by June 30, 2020 and then the Record of Decision soon after.

The Thesis

Let keep it simple and explain the setup. After a recently completed secondary offering on April 28, 2020, there are now 436.6 million shares of NAK outstanding. Outside of the shares, there are 58 million worth of additional options and warrants, so we are talking about a fully diluted share count of 494.6 million.

So, 495 million shares x $0.71 per share equals a market capitalization of $351.5 million.

If Ron Thiessen is correct and NAK successfully secures the Final EIS and Record of Decision, then this a permitted mine. Given that it contains the world's second-largest gold reserve at 71 million ounces (measured & indicated) and 57 billion lbs. of copper (measured & indicated), the stock completely re-rates.

Now, I fully get it that only a world-class miner like a Barrick Gold Corporation (GOLD) with its $50 billion current market capitalization, a Freeport-McMoRan Inc. (FCX) with its nearly $13 billion market capitalization, or perhaps a dark horse like a BHP Group (BHP) with its nearly $93 billion market capitalization would have the resources and technical expertise to deliver this safely and on budget. Perhaps there would be a consortium of mining group that would get involved. And, of course, I get it that the CAPEX involved here would be in the $5-6 billion neighborhood.

So, if Pebble get permitted, then what is it worth?

I have no idea, but I would venture to guess that it would fetch $1 billion ($2 per share) to $2 billion ($4 per share). Based on my math, in the bull case, assuming that Northern Dynasty's management can deliver, we are looking at a potential return of 2.8X-5.6X (so $2 per share/$0.71 or $4 per share/$0.71). Given the upside potential as we have a clearly identifiable catalyst and a stock that has been left for dead, I got long the stock after having been on the sidelines since May 2017.

Risks

This is mining, and black swan events tend surface more frequently in this sector than, shall we say, a defensive name like a Proctor & Gamble (PG). You can bet your bottom dollar that protesters and politics opposition groups will target shareholder meetings of would-be acquirers. Moreover, it is possible that ESG folks and pension funds could threaten to sell their shares, should, say, a Barrick Gold acquire a permitted Pebble mine. That said, Northern Dynasty's management seemed reasonably confident that they will secure the Final EIS and Record of Decision, and if that is the case, then the stock should at least be a 2-bagger.

Conclusion

Despite the risks, NAK seems really compelling, as the upside is asymmetric and we have a clearly identified catalyst. Gold is currently trading at $1,700 per oz., and there is a strong bid for the equities of a Barrick Gold given the record U.S. deficits and interest rates destined to be pinned under 1% (10-Year U.S. Treasuries) for years. Now, given that companies like Barrick need to replace their reserve base as they deplete their reserves and resource base every year, the Pebble deposit could be perfect for them. Therefore, I don't think it is unreasonable for, say, a Barrick Gold or some other large miner to pay at least $1 billion for a permitted Pebble. That said, given the sheer size of the deposit, perhaps it could go for $2 billion in a bidding war. It is hard to know.

Also, it should be noted that given the significant number of high-paying jobs this project would create, not to mention bring much-needed infrastructure (as a by-product of the construction) as well as tax revenue via royalties sharing, this should tip the scales in favor of the project, especially given how low oil prices are and how that affects a major Alaskan revenue source. Moreover, it wouldn't take that active an imagination to think President Trump would be in support of this type of project given the economic development benefits, including these $100K per year jobs.

Finally, the stock's technicals and the uptick in volume seem to point to upward price momentum. Shares look rather compelling at $0.71 per share and like a good flyer. As such, I sized my bet at 4% of my portfolio.

Analyst’s 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.