Difficult To See Where Northern Dynasty Goes From Here (NYSE:NAK)

The Basics

Pebble Bay is a perfectly sensible mining proposal. A large copper/gold/molybdenum deposit in an area where near no people live. Given the EV revolution we might think this is a no brainer to go mine.

Except, of course, areas where near no people live are those untouched wilds which often must remain untouched. So, the environmentalists have been out in force insisting that the mine should not be allowed to go ahead.

Well, we can make up our own minds about that trade off. A vast copper deposit or some wilderness? My own view is that there’s an awful lot of Alaska and not all that much copper so go mine but I am often enough out of step with the mood of the times.

Northern Dynasty Minerals (NYSE: NAK)

This is of course a bit of a blow for Northern Dynasty Minerals which owns those mining rights to Pebble Bay. If we rely upon their own estimations, then the mine has a net asset value of well over $2 billion. The market value of the company is currently a little north of $200 million. That’s a heck of a gap right there. So, we could be tempted to play a little in the stock and see whether they can overcome those environmental objections to the mine.

Elephant Analytics has done a perfectly sensible dive into the financial numbers for Northern here. There’s no point in repeating the good work of others so if those details interest, read that.

I would pick up on one point here, which is that at the current run rate Northern needs more cash around this time next year. Which would have to come from stockholders, there is no other possible source.

There are three points I’d make though before we think about having a nibble.

Mines are opposed all the time, so what?

It’s true that near ever attempt to open a new mine has to run the gauntlet of environmental cases and objections. We’ll come to one that seems to be about successful in doing that in a moment too. But most of those are folk try to jam a stick in the gears however. To complain that this t in that part of the plan wasn’t crossed and just make the whole exercise more difficult and expensive. If enough people do this then maybe the company will give up?

So, the process is to simply grind through the courts and address every little complaint, one by one. Eventually, given that the complaints aren’t based upon anything substantial, the mine wins and can, eventually, open.

I think though that the level at which the rules are applying here mean that the outcome could or will be different. We’ve actually got Federal interference here, in the sense of placing restrictions upon the very waters of the bay itself. This particular mine just seems to have caught that large scale notice. This isn’t the same, I don’t think at least, as trying to fight through unfounded complaints from a local group of 5 busybodies.

This is the first problem I see. That it’s going to need a change of administration – and attitude – in Washington DC before Pebble is going to get approved. It’s not just a matter of chewing through the local courts here, it’s national.

Other mines do it though

It is true that other mines have managed to chew through those local objections. One we’ve talked about here just recently, PolyMet, looks on the cusp of succeeding. It has taken years though, years and years.

As above I think that Northern Dynasty’s problems are at a higher level – the Federal – of politics. There is political opposition at the national level that is. We’re not just having to fight cases about whether the mine plan properly accounts for water in this watershed.

It’s worth noting though that PolyMet has been spending substantial amounts of money each and every year to achieve this. As I say, I think the Northern Dynasty problems are greater and most certainly aren’t going to be cheaper to solve. This means that even if Northern does fight on to a successful conclusion there’s simply got to be a continuing dilution of current shareholders to pay for that fight.

Dilution for a decade perhaps to maybe – maybe – gain permission to mine? I’m not convinced myself to be honest.

And now the biggie

PolyMet has one grand advantage over Northern Dynasty. Which is that they’ve a committed and large shareholder – Glencore. Glencore owns 70% and has put in $400 million over the years. To Glencore this is real cash of course, significant money. But the next piece of money to carry the fight along for another year? Just a marginal expense, an option payment almost. If you’re down $400,000 and you need to add another $10,000 each year for a decade? Why not. Especially as the payoff would indeed be substantial.

Also note also that corporations are, unlike us, immortal. Or at least have longer timescales.

Northern Dynasty doesn’t have that, that keystone mining company shareholder. The large holders are varied investment funds, not people in the business. This means two things. Firstly, there’s no large industry voice on their side. In fact, the one that was there quit on the basis that the opposition was too fierce. Rio Tinto walked out back in 2014 for example.

That also means that there’s no deep pocket to keep the regulatory show on the road. It’s down to current shareholders to do this. Which means either continual capital raises or dilution.

My view

I don’t see it to be honest. I agree that mining projects in the US at least have had to face these sorts of battery by lawsuit and some have won through. I don’t see Pebble as being one likely to do so.

It is opinion and it is opinion only, but I think the Federal opposition, that move into national politics, militates against a legal solution. And the absence of a large miner as a partner makes me wonder whether the necessary capital to even try will be continually raised on decent terms. Terms decent enough not to ruin the proposition for current stockholders anyway.

It’s the combination of those two things that makes me think Northern isn’t going to be able to mine.

The investor view

Of course, I agree I would be wrong. I can see – as there just has been this last few weeks – bounces around in the stock price as opinions change, or as the metals value of what might be unlikely to be mined changes.

I can even see the value of sticking $500 worth into the grandchildren’s college funds on the basis of why not? But as an investment from where we are now to something that will be mining in the next 10 to 15 years? I think it’s most, most, unlikely.

On traditional evaluations of probability and net present values I regret to say that I think Northern Dynasty is uninvestable.