Northern Dynasty Minerals: Huge Potential May Frustrate Near Term Investors

This is part 8 of a 10-pack series of metals miners articles. You can find articles for Great Basin Gold (GBG), Entree Gold (EGI), Jaguar Mining (JAG), Seabridge Gold (SA), AuRico (AUQ), Silvercorp Metals (SVM), and Brigus Gold (BRD) here at Seeking Alpha.

Northern Dynasty Minerals (NAK) is a copper and gold exploration company with a large mineral deposit in Alaska. The company has a partnership with Anglo American (AAUKF.PK) since 2007 to develop the Pebble deposit. Anglo is on the hook for 2011 costs and will spend $1.5 billion before NAK is responsible for 50% of the development costs.

The project is estimated to be the largest undeveloped copper-gold-molybdenum porphyry system in the world and contains a Measured and Indicated 67 million ounces of gold at 0.35 grams per ton, 55 billion pounds of copper at 0.42%, and 3.3 billion pounds of molybdenum at 250 ppm. Northern Dynasty has conducted a preliminary assessment and estimates that a 45 year mine project yields $2.4 billion post-tax NPV at a 7% discount rate.

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Molybdenum resembles graphite and lead. The mineral is used for steel hardening, and is highly resistant to heat, making it useful as a filament. Molybdenum has very few substitutes and has many industrial applications.

The pre-feasibility study is expected to be complete in 2012, at which time the permitting and feasibility assessments will begin. Permitting is expected to take until 2014, at which mine construction may begin and production slated to start in 2019. Given the long time line for project development, current value consists mainly of future expectations of the project and the share price can be expected to be volatile until the permitting is complete.

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Complicating the permitting process is opposition to the project by environmentalists, scientists, and aboriginals. The main object is endangerment of a major salmon fishery nearby and contamination of the environment by mining tailings. Northern Dynasty and Anglo American intend to build a pipeline to a nearby port to transport tailings, and in addition will need to develop 86 miles of road over previously undeveloped Alaskan territory. Pebble Partnership is an aggressive, albeit gigantic, project.

If all goes according to plan, the companies will share a long-life mine with incredible profit potential. The mine is expected to be able to support 15-20% of American copper needs for up to 80 years at current usage rates. In addition, the 67 million ounces of gold are incredibly profitable at current market prices.

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The Alaskan court recently ruled in favor of the Pebble Partnership on constitutionality of mining the project, and did not find evidence of environmental harm. However, opposition groups are expected to mount additional campaigns to prevent the construction of Pebble project mine. Some positives for the local economy are creation of 2000 jobs and establishment of economy in an area of Alaska that is so far undeveloped.

Perhaps facing stiff opposition and perhaps due to the financial commitment required by the project, Northern Dynasty offered its share of the project for sale earlier in 2011, but there were no takers for it. So far NAK has used equity to finance costs. But at current share prices and given the timeline to production, the company may feel as though other smaller-scale and near term projects fit the company objectives better. The official company line has been to get in front of a potential buyout by a larger firm at a discounted valuation. And it is possible they know something about the project that has not been publicly divulged.

These factors offer plenty of doubt to potential stock investors. If the partnership can overcome the hurdles and bring the mine to fruition, investors will be rewarded with astounding growth value and potentially long-lived dividend payouts for Northern Dynasty shares.

Is the risk worth the early buy-in? I think investors have more time to decide. The share price will bounce around on expectations, but what do we really know until the permits are completed? More will be clear about NAK’s intentions in three years when mine constructions starts, and the expected additional information about Pebble projects’ bounty and cost structure will help investors more accurately evaluate the opportunity against their investment horizon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.