Northern Dynasty Minerals (NAK) is a precious and rare-earth metal exploration company headquartered in Alaska. The company does not currently have meaningful revenue-generating operations but has been pursuing a highly politically-charged project in a copper-gold-molybdenum project in Alaska.
This “Pebble Mine” project has the potential to significantly boost NAK’s value. It is known that there are significant likely reserves of gold, copper, and molybdenum (a rare-earth metal that is largely produced in China). It is not entirely clear what returns these reserves will generate, but other analysts have estimated an unequivocal permit approval would increase NAK’s fair-value to $2-$4 per share.
Indeed, the long-term return potential could be even higher as major mining companies look to acquire. However, Northern Dynasty has been pulled deep into the muck of ongoing U.S. political turmoil. With Biden expected to take office in January, NAK’s prospects appear to have turned from poor to awful.
A Microcosm of U.S. Political Turmoil
The Pebble project has been subject to significant angst among political leaders as its location is home to a major wild salmon fishing area and is home to hundreds of fishing, hunting, and outdoor businesses and organizations. Not only are many environmental groups fighting the mining project but also Republicans like Donald Trump Jr., and Alaskan Senator Lisa Murkowski, who recently pledged to take further congressional actions including the use of the federal appropriations process to protect the Bristol Bay region. It is worth pointing out the Murkowski is the chairman of the Senate Energy and Natural Resources Committee which gives her power Federal over environmental policy.
The Alaskan Republican Party has officially endorsed the Pebble Mine project’s development and in July, the U.S. Army Corps of Engineers released an environmental impact statement supporting development. However, the stock has lost over half to its value since June and recently suffered large losses on the Biden victory as he has stated his opposition to the mine’s construction. See the stock’s recent performance below:
The peak came in July as the U.S. Army Corps of Engineers gave NAK a positive environmental review. However, the stock plummeted in August after the Trump administration blocked the mine’s development. The Corps then gave Northern Dynasty 90 days to respond to its mitigation plans to protect wetlands.
While Trump wants to increase rare-earth metal production, he has not been supportive of the Pebble mine. However, there was still hope among many investors that he would change his mind as he later mentioned “no-politics” would be involved in the review process. With Biden expected to take office in January and an overall increase in Democratic control in Congress, Northern Dynasty’s prospects are severely blunted.
The CEO of the Pebble Limited Partnership also resigned in September after calls were secretly recorded (by activists posing as potential investors) where he boasted about relationships with GOP leaders and his effort to funnel money to Alaska’s Republican politicians. Pebble’s leadership also said that it planned to raise additional capital from investors and another $1.5B from the State of Alaska.
Given the pushback from lawmakers against the project, it is highly unlikely that they would give Northern Dynasty funds to pursue the project. This is problematic because it means the company may be making efforts to mislead investors (behind closed doors) about the viability of its project. This has caused short-seller J Capital Research to claim the company is ‘gaslighting investors‘.
With Democratic leaders taking office and many Republicans not supporting the Pebble project, Pebble’s projects have been seriously diminished. The company has been pulled into a very similar situation to the owners of the Keystone XL Pipeline. The only major difference is that Northern is entirely dependent on Pebble’s successful permitting and there appear to be more bipartisan efforts against Pebble. Biden has vowed to block the mine, so investors should be very cautious about betting that it will be approved.
What is NAK Worth Given a Permit Victory?
At this point, it is still possible Pebble will eventually be improved. It is home to one of the largest copper and gold deposits in the world and the company states its total resource is equivalent to 1.8% of all gold ever mined (latest investor presentation pg. 5). Indeed, this is a huge resource worth many billions, particularly for a company with a market capitalization of only $397M.
Of course, if it can manage to win a successful ‘record of decision’ from the Army, it will still need to go through State permitting and is not expected to commence mining operations until 2026-2027. Still, the company would likely sell the mine to a larger company quickly after a successful permit, opening the door to a quick estimated 3-5X return from its current price.
While the probability of a successful permit has declined, the project would likely deliver very strong returns to investors due to the vast resources which are inferred by exploration. Northern believes they would pull 362K oz of gold out of the ground per year which currently be worth $680M in revenue. This would likely around 200-$300M in profits based on the AISC of most miners.
Add on the significant copper, silver, and rare-earth estimated reserves, Northern could certainly generate $500M+ in annual profits. This gives me a conservative estimated fair-value valuation of $2B using a low “P/E” of 4X (400% higher – $4.13 per share) which depends on successful permitting and development. The risk that these estimates are not accurate remains an additional risk factor to consider.
The Bottom Line
There is little doubt that NAK will deliver significant returns if it can successfully win a permit. The company has made an effort to demonstrate its environmental feasibility and the Army Corps of Engineers did state that it believed the project would meet standards. Still, the company has been pulled deep into the era of U.S. political drama and division as well as growing environmental activism. Even worse, it has become one of the few areas where there is some bipartisan agreement that the Pebble project should not go forward. Since the Army COE operates at the pleasure of the President, he could have the project vetoed as the Obama-Biden Administration did in 2014.
In the less likely chance that Northern wins this battle in the face of recent events, it would likely double (if not more) so it is probably best not to short the stock. Personally, I would not touch the company and would much rather buy safer gold miners which are not a subject of U.S. political drama. Still, the company does have warrants trading on Canadian exchanges which I believe offers a much better risk-reward opportunity since they will gain more in the off-chance that the mine is successfully permitted and not blocked by the Biden administration.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.