Northern Dynasty mega-project needs strong prices

It is, by any measure, a gigantic project.

Northern Dynasty Minerals Ltd. has released a bullish independent economic assessment for the Pebble project in Alaska. The deposit holds more than 72 billion pounds of copper, 94 million ounces of gold, and 4.8 billion pounds of molybdenum, numbers that are truly eye-popping. And the study proves that it can work.

Canaccord Genuity analyst Wendell Zerb wrote that the project provides excellent copper leverage and gold exposure. However, he pointed out a legitimate concern.

“The economics outlined by the [preliminary assessment] demonstrates a high leverage factor, and the project requires strong long-term metal prices to justify the large capital commitment,” he wrote.

That’s for sure. The initial capital cost for an open-pit operation is pegged at US$4.7-billion. And to generate a strong 18% pre-tax rate of return for Northern Dynasty, the study assumes a copper price of US$2.50 a pound and a gold price of US$1,050 an ounce. While those prices are well below current levels, they are still very high by historical standards.

Raymond James analyst Tom Meyer wrote that Northern Dynasty looks attractive compared to Ivanhoe Mines Ltd., its closest peer since both have massive copper-gold deposits. The difference for him is valuation. He wrote that Northern Dynasty trades at a price-to-net-asset-value multiple of 0.52 times, while Ivanhoe trades at 1.28 times.

His net asset value estimate for Northern Dynasty fell 32% after the assessment, because he modeled both open pit and underground mines (whereas the study assumed open pit only). However, he maintained a “strong buy” rating on the stock and a target price of $25.00 a share. Mr. Zerb rates the stock a “speculative buy” with a $23.90 target.

Pebble is a 50-50 joint venture between Northern Dynasty and Anglo American PLC.