Oct. 11, 2017 8:46 AM ET|
10 comments|
About: Northern Dynasty Minerals Ltd (NAK)
Otto Capital
Otto Capital
Long only, Deep Value
(19 followers)
Summary
Credible and aligned management team has been stating that Northern Dynasty (NAK) is close to reaching a partner agreement.
They have already earned the right to normal course permitting with the EPA settlement.
Partner event will materially de-risk the project, which could mean multiple times the current market capitalization.
Northern Dynasty Minerals (NYSEMKT:NAK) has awaken from 4 years of deep sleep caused by the preemptive veto from the Environmental Protective Agency. Many other pieces explain the history leading to this moment, so I will focus on the most recent developments and some of the subtleties of the rhetoric.
Starting with settlement reached by Northern Dynasty Minerals with the EPA on May 12, 2017, the company effectively earned the right to take the Pebble Mine through the normal permitting process. The obvious significance here is that the settlement has cleared the road for partners to be brought back to the table to support the CAPEX on developing Pebble. However, it also shows that management of NAK is resilient and has the correct mindset of looking to win the long war (getting Pebble operational) rather than the short-term battles and worries.
Imagine being in the shoes of Mr. Thiessen or Mr. Collier for half a decade where your only agenda is to fight a battle where the rules have been changed in favor of the other side, with the real possibility of your cause simply disappearing under bureaucracy and red tape. Obviously new EPA administration played a key role here (albeit Mr. Collier did mention that they had reached an agreement with the Obama EPA as well), but they plowed ahead nevertheless. Kudos to the management team for their grit during this process!
Then, listening to the opposition for the last 4-6 years without much capital (political or financial) to fight back, they unveil last week a new mining design (link above) that addresses the vast majority of the complaints, in what seems like an important compromise, at least in the initial phase, compared to the Pebble potential.
The point here is, the current management team will do whatever is necessary to see that Pebble goes through permitting and gets approved! They’ve been at it for more than a decade and are at the final innings now.
Ok, but what about valuation? There are all kinds of estimates out there, ranging from $0 per share from the short piece by Kerrisdale Capital Management to an estimate for a fully operational mine based on in situ value of the minerals of ~ $70 per share, so clearly there is no consent.
Breaking it by pieces:
Kerrisdale released their report on Feb 14th, 2017, when shares of NAK traded at $3.30. Their main claim was not related to permitting, but to the viability of extracting the minerals, which they believed meant no one would put money in NAK to develop the site so The End. Shares collapsed to $1.05 in the following weeks.
Mike Kozak, from Cantor Fitzgerald published a detailed report on June 5th, 2017 where he thoroughly described the situation that Pebble is in, provides very useful background since November 2001 and goes on to model what a potential Joint Venture (JV) could look like for Northern Dynasty.
Using comparable deals he draws a parallel for what a deal could look like, he arrives at a 52-week target price of $3.75/share of NAK (look up the report for the calculation). He goes on to say:
Excellent Asymmetric Trade Short-Term: At current share price levels, Northern Dynasty is not “pricing in” any potential for a JV partner, and in the event that a deal is struck similar to the original Anglo earn-in, the upside potential in Northern Dynasty is massive. We believe potential JV partners are lined up, and a deal will be completed in the short-term. As a result, we view NAK/NDM as an excellent asymmetric risk-reward trade.
Northern Dynasty presents the following logic regarding valuation (page 25 of the Corporate Presentation), based on Contained Metal:
NAK September 2017 – Share Price $1.55, $0.57 /lb of copper, $8 /oz of gold
Developer Average – Equivalent Share Price $12.1, $1.4 /lb of copper, $43 /oz of gold
Producer Average – Equivalent Share Price $71, $18.4 /lb of copper, $107 /oz of gold
At the Denver Gold Forum that took place on September 26, 2017, Mr. Thiessen remarked (around minute 15 of his speech):
The value proposition, embarrassingly, Pebble, Northern Dynasty, can be seen trading market cap wise… at $8/oz of measured and indicated contained gold, and the developer average, where we truly should be, at a minimum, is $43/oz. Or at $0.57/ lb of contained copper, compared to developer average of almost 3 times that.
Then he goes on:
The reality is, if you look at the producer average, there is the real opportunity, if this asset was owned by one of the major producers the valuation would be much higher.
Today (October 9, 2017) Northern Dynasty shares are hovering around $1.90, which leads one’s reasoning to the idea that the market continues to think a JV partner will not present itself. Despite many mentions by Mr. Thiessen and Mr. Collier that management and advisors are nearing a deal with a potential consortium of large miners, current valuation is calling it a bluff.
This is the same management team that risked their careers for over a decade to develop this site and fight the EPA on their overstepping of Northern Dynasty’s legal rights. The same team that has gone to length to adapt the project so that the local communities in Alaska would support it as a development tool for the region. The same guys that have gone on record saying they are embarrassed by where their company trades versus to where it would trade if a major mining partner would come on board.
With this backdrop, it seems like Kerrisdale’s report continues to bring doubt to the table (despite very significant improvement in all fronts since early in the year) as shares are 45% below where they traded prior to the report.
It also seems, that despite a very comprehensive and well written report, Cantor is thinking about where a deal could get done, not what could happen to shares after that deal. If the Developer Average, using public market comparables is $12.1/share and for that NAK needs a partner with deep pockets and fair permitting rights (which it already has), then it seems that if they get a JV at $3.75 share, the derisking of the project takes it to a completely different place in terms of value.
Mixing it all in, Northern Dynasty is a case of credible management, which has aligned incentives with shareholders (they own ~8% of the asset) that is speaking loud and clear about a consortium being close to getting done, which alone should be valued at about $3.75 /share (97% upside) and that along with the right to engage in permitting, can take prices north of $12, based on publicly listed comparable companies (530% upside). Northern Dynasty Minerals shares are massively undervalued at $1.9.
Disclosure: I am/we are long NAK.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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