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Written by SmallCapPower Staff

Shares of Northern Dynasty Minerals Ltd. (TSX:NDM), which explores one of the world’s largest copper-gold resource at its Pebble project in Alaska, have been seen in a more favourable light recently on positive developments related to the settlement with the EPA.

• Northern Dynasty Minerals' stock had been on an upward trend in anticipation of favorable news going back to March, 2017.
• Then on April 12,  2017, its share price zoomed nearly 32% to reach $1.89 on news that the Alaska Department of Natural Resources issued a notice of approval of Miscellaneous Land Use Permit for the Pebble Project.
• In the run up to the settlement, the shares surged nearly 28% on May 8 and 9 to close at $2.84 but had been on a gradual decline due to the “buy on rumor” and “sell on news” behaviour of investors.
• Northern Dynasty Minerals' stock gained 8% post the July 11 news of the EPA beginning the process to withdraw its earlier restriction under the CWA.

Northern Dynasty Minerals – 1 Year Chart

Investment Thesis

• On May 12^th, Northern Dynasty Minerals announced the legal settlement with EPA, which should pave the way for the development of the Pebble project
• The Pebble copper-gold hosts contained resources of 57 billion pounds of copper and 70 M ozt of gold
• Balance sheet is healthy with $54.7 million of cash equivalents and no debt

Legal settlement with EPA clears obstacles for Pebble mine development

After nearly a decade of litigations with regulators, Northern Dynasty Minerals announced on May 12 2017, that it reached a settlement agreement with the U.S. EPA that allows the Pebble Project to proceed into normal course permitting under the CWA and National Environmental Policy Act.

On July 11, 2017, consequent to the settlement agreement, the EPA began a process to withdraw a Proposed Determination it issued under the Clean Water Act in 2014, which paves the way for the normal development of the large copper and gold Pebble Project.

World-class copper and gold resource

The Company’s flagship Pebble Project located in the state of Alaska hosts one of the world’s largest copper and gold resources of 6.44 billion tonnes of Measured and Indicated containing 57 billion lb of copper and 70 M ozt of gold.

Total resources at Pebble Project

Source: 2014 Technical Report

Permitting is likely to be completed over next 3-4 years with final production expected in 2024: Although the mine development is a long process with production expected to begin only in 2024, investors’ interest may be kept alive through the various news events that may flow in over the next several months and years including completion of permitting (2017-2020), pre-feasibility study (2017), multi-pronged strategy and financing partner (2017-2020), and feasibility study (2021), amongst others.

Timeline of Pebble Project

Source: Company presentation

Healthy cash balances and no debt

As of March 31^st 2017, Northern Dynasty Minerals had a cash balance of ~$55 million ($49 million raised during the quarter through a bought deal financing) and had no debt. Northern Dynasty Minerals believes the available cash resources will be able to meet key corporate and Pebble Project expenditure requirements to at least the end of the fiscal year. We note that Northern Dynasty Minerals is looking for a new funding partner to accelerate the construction of the Pebble Project including the permitting process, which requires ~$150 million. Northern Dynasty Minerals also has 58.6 million options and warrants including 16 million options exercisable at $3, which could provide ~$60 million in case the stock price reaches that level.

Mine economics could be the only concern

Although the Pebble resource is large, relatively low grades (0.4% Cu and 0.34 g/t gold) and high mining costs could make the mine commercially not feasible. Anglo American, the former partner of the Company, exited the project citing project economics and underreporting of costs by Northern Dynasty Minerals in its 2011 Preliminary Assessment, which puts the initial capital cost at only $4.7 billion as against the $13 billion estimated by Anglo. Assuming sustaining capex of $3.2 billion, unit mine operation costs of $11.16/ton and copper cash cost of $2.17, the Preliminary Assessment study envisages production of CuEq of 24.4 Mlb, translating into an NPV of $3.8 billion. The revised costs and returns will be known when Northern Dynasty Minerals releases its pre-feasibility study sometime this year.

Valuation

Northern Dynasty Minerals’ in-situ values for copper and gold stand at C$0.47/lb and US$7.0/oz Enterprise value/resource respectively, lower than the developer and producer averages, which are C$0.86/lb and US$15/lb for copper and US$48/oz and US$108/oz for gold, presenting significant valuation upside potential for Northern Dynasty Minerals as the mine development advances. At the developer averages, the Company’s valuation could be US$11.4 (US$9.4 for gold and US$2.4 for copper) while the valuation could be more than US$60 per share at the producer averages.

Valuation of Northern Dynasty

Source: Company presentation, Bloomberg, BMO Capital Markets

Outlook

As Northern Dynasty Minerals advances its Pebble project post the clearance from the EPA, we believe investor interest could continue to drive the share price up as news of key catalysts flow in over the next several months. At the same time, the ability of Northern Dynasty Minerals to raise capital for the permitting and development amidst concerns on low project economics could play spoilsport on the stock price.