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MonsurOrleans
MonsurOrleans' Blog
Pending Northern Dynasty Minerals LTD's (NAK) News Could Make Price JUMP To $21 With Over $10 Billion Valuation
Jun. 10, 2020 2:58 PM ET|About: Northern Dynasty Minerals Ltd. (NAK), Includes: BBL, FCX, GOLD, NEM, NG
Summary
We believe the regulatory hurdles for Northern Dynasty are largely over and the State of Alaska is supportive of the mine operations.
We believe a financing deal for Northern Dynasty is imminent.
We believe the mineral deposits Northern Dynasty controls are worth $11.2 billion using a Discounted Cash Flow model.
We believe Northern Dynasty’s comparable firms (comps)indicate a valuation much higher.
Based on both a discounted cash flow model and comps, webelieve Northern Dynasty’s valuation should increase to between $5 Billion to$10 billion, indicating a stock price between $11 and $22.
Northern Dynasty Minerals Ltd. (NYSE: NAK) owns the mineral rights to one of, if not the largest undeveloped gold and copper mines in the world. The property, named Pebble or the Pebble Project, is in a remote area of Alaska where a flight is the only practical way in or out.
COMPANY BACKGROUND
The Pebble mine’s potential footprint is light compared to many others, but during the Obama Administration, the company ran into an unusual battle with the Environmental Protection Agency (EPA), that did not start to loosen until the end of his administration.
Even after the EPA removed their objections, the federal permitting process has been slow and methodical. This is to be expected, partly because the mine is about 100 miles away from world class fisheries in Bristol Bay.
To ensure proper environmental concerns are addressed. Licensing processes starts with the environmental impact statement (EIS), which is overseen by the U.S. Army Corp of Engineers (ACoE). They in turn work with other stakeholders, such as the EPA, Northern Dynasty, environmental lobbyists and more.
Pebble has spent hundreds of millions of dollars on environmental studies, and many of those studies have proven relevant. The long permitting process is starting to move quickly.
The ACoE released a schedule regarding the Pebble project and the mine registration process. That timeline can be found here. So far, the actual timeline has largely mirrored the projected one. For example, in the projected timeline, a draft EIS was to be submitted in February 2019 and it was. Public Review of draft EIS was on target too.
On May 25th, U.S. Army Corps of Engineers (ACoE), the lead federal regulator for the Environmental Impact Statement (“EIS”) permitting process for the Pebble Project, proposed an acceptable process for the environmental impact of Pebble (see here). This process assuages many concerns about water transportation and salmon production.
On May 29, 2020, the Environmental Protection Agency (EPA) expressed confidence in Pebble permitting and opted not to elevate approval (see here). A move, they have indicated meant they would not oppose permitting further.
According to this ACoE timeline, the Final EIS (FEIS) and Record of Decision (ROD) are to be completed in the next weeks. We believe these events are largely a foregone conclusion now that the EPA is not opposing permitting -- see here.
Who is left to object before that short timeline? Afterall, those opposed had their opportunity during the ACoE and EPA vetting process. Arguments and complaints were heard according on the scheduled timeline of ACoE.
REMAINING REGULATORY HURDLES
The State Regulators: Alaska has an incentive to help Northern Dynasty get to production. According to Northern Dynasty’s CEO, there will be 2,000 direct jobs during construction, 1,100 to 1,200 jobs during operation, each mining job paying between $100,000 to $120,000 a year (see here). The county in Alaska where the jobs are to be delivered, is the poorest county in all of America (again here); And the state of Alaska will collect royalties and taxes on all of the mining production during a time when it economically is suffering.
According to the Anchorage Daily News, Governor Mike Dunleavy is a proponent for the Pebble Project, so long as the science supports it. Further outside environmental groups don’t want Pebble examined under the light of science because they know it will “pass with flying colors” (see here). So, it is reasonable to assume that state regulators will be friendly to Northern Dynasty.
So, we believe the government of Alaska is a proponent not an opponent.
The Federal Regulators: After FEIS and ROD, it is difficult for any legal challenges to stop mine production, even those from whomever is the next president, because that person will not take office until after ROD.
Native American Tribes: We believe tribe agreements will happen because there is a large monetary benefit likely to be given. Also, tribal live would likely be better with better access roads. Lastly, the footprint of the land is so remote and small, that fighting for its domain likely does not make sense.
However, even if tribes oppose, the state of Alaska can force easement and is incented to do so for the reasons mentioned above.
Other Lawsuits: Of course, there likely would be lawsuits, but since there was already a vetting process and since the EPA and ACoE are supportive, those efforts will likely be no different than other mines who made it this far through the registration process.
OTHER HURDLES
Financing
Northern Dynasty is already on record for saying it needed financing, and that it will happen shortly, meaning before FEIS (see here and here).
We reiterate what we wrote above, FEIS is imminent, so believe an announcement for financing will come in days or weeks and likely will be a Joint Venture.
The capital expenditures to mine in such a remote area, is not small by any means. A joint venture (JV) with capital expenditure, assuages and mitigates many of these concerns by allowing the deep pockets to confront these challenges. We believe acquisition or a JV is very likely for the following reasons:
Northern Dynasty has successfully entered JV’s in the past
Northern Dynasty’s gold and copper mines are the biggest reserves in the world and make a very attractive JV opportunity
If a major mining company does not enter into a JV with Northern Dynasty, they risk being surprised in production by those who do
It represents a lot of money to these firms and notoriety
Joint Venture or Acquisition
Possible companies to do a JV or acquisition are Barrick Gold Corporation (NYSE: GOLD) and Newmont (NYSE: NEM). They are very large gold companies, see here. Or for Northern Dynasty’s copper, suiters could be Freeport-McMoRan Inc. (NYSE: FCX) and BHP Group Limited (NYSE: BBL).
However, one stands out above all the rest because of “the history”. Barrick.
On October 12, 2017, Pebble hired James Fueg to be its V.P. of Permitting. Mr. Fueg oversaw permitting at Barrick's Donlin Mine and had worked for Barrick. When Pebble hired him, it was probably considered a secondment rather than him jumping ship from Barrick.
If Barrick does a JV with Northern Dynasty, the recent decision by the ACoE to use the Northern Route, could prove to be useful to Barrick’s Donlin asset, because it could use the Northern Route too. How perfect would that be!
So, if Pebble is acquired, what would become the valuation of Northern Dynasty? The answer lies in the numbers:
VALUTATION
Discounted Cash Flow Model of Just Minerals
Northern Dynasty’s Vice President of Corporate Communication stated (here) that the Pebble mine will run for at least twenty years and produce annually 318 million pounds of copper, 362,000 ounces of gold, 12.3 million pounds of molybdenum, and 1.8 million ounces of silver for the next twenty years.
We used that data and a current metal prices of $2.56 per pound for copper, $1,698 per ounce for gold, $10.89 per pound for molybdenum, and $17.59 per ounce for silver—to determine the future value of these minerals. Then, using a discounted cash flow (DCF) model, we came to a current day valuation of the minerals. Our assumptions were a 7% discount rate, six years before they could start production, and an annuity of 20 years. This calculation results in a valuation for the minerals of $11.2 billion (see below):
We believe a 7% discount rate is appropriate, given the current economic and political environment. However, even a 10% discount rate, would yield a valuation of $7.7 billion (see below):
It should be noted, this is not discounting back the cash-flows or considering expenses. The reason for this is simple:
We don’t know what expenses will be or even have a clue because the company is pre-production and a lot can happen
If Northern Dynasty gets a JV, then there capex will be covered at least partially by the JV and for likely a very long time.
So, speculating on expenses without any clue about all these parameters makes no sense whatsoever. In the company’s valuation below, this is already considered in a discount.
Possible Upside
We believe the future price of precious metals could rise with increasing political, economic, or viral turmoil, which represents upside to the mineral valuations above.
We believe mining for more than 20 years or 10% of the measured and indicated minerals, could represent upside to the mineral valuations as well.
Comps
According to Northern Dynasty (here and here), its copper and gold mines are the 1st or 2nd largest undeveloped deposits in the world. Barrick Gold Corp (Ticker: GOLD) has much smaller remaining deposits. Yet Barrick has a valuation north of $41 Billion. We believe Northern Dynasty should have a valuation at least 25% of that of Barrick’s, since it has much greater value of resources.
We understand that there is still regulatory hurdles and production hurdles left for Northern Dynasty that Barrick has already passed. However, when factoring the remaining risks and the time to production, we believe a 75% discount is more than enough to account for these factors. Particularly given that the DCF model accounts for the time factors and supports this type of valuation and the remaining regulatory hurdles are low now. A 75% discount on $41 Billion would put Northern Dynasty’s valuation at about $10 Billion or $21.63 a share.
Novagold (Ticker: NG), like Northern Dynasty, is also in the permitting and pre-production process. They have a J.V. with Barrick; however, they have much fewer mineral reserves. For comparison, Novagold was scheduled to process 53,000 tons of gold per day compared to Pebble’s proposed 100,000 to 200,000 tons per day (see here) . So, Pebble has two to four times more gold (which is not considering how much more copper and other minerals Pebble has).
Yet, Novagold has a valuation of 2.65 Billion. If that valuation is used with shares outstanding of Northern Dynasty, that equates to a price of approximately $5.73, however since Novagold is much smaller (at least half it’s size in gold and without the copper capabilities), we believe it is reasonable to attribute a multiple of two to four times or $11.46 to $22.92.
CONCLUSION
Pricing based on comps and a DCF model is between $11 and $24. However, most comps and the DCF model support a price in the $20s. We suspect that Northern Dynasty management is looking for financing partners and that a partner will be announced shortly based on this (here) timeline published by management.
Disclosure: I am/we are long NAK.
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