Friday, May 21, 2004 4:52:42 PM
This Gold Deposit is Big...
and
It's Very Real
This Special Issue of Resource Opportunities
is devoted to Northern Dynasty Minerals
(NDM-TSXV; NDMLF-OTCBB)
See bottom for important disclosure information
Northern Dynasty recently established its Pebble project as the largest gold deposit in North America.
At the present share price, this company is valued at a mere $8 per ounce of inferred resource, a fraction of the potential value of that vast deposit.
As the Pebble project advances over the coming months, and as investors gain a greater appreciation of the merits of the project, the valuation should move up in line with similar projects, generating the potential for big returns to investors.
Northern Dynasty optioned the massive Pebble gold-copper deposit in Alaska from a major mining company three years ago, while the gold price was at a 20 year low. They saw tremendous potential to expand an already huge deposit and discover an entire district of a new deposits.
The results exceeded even the most optimistic expectations. Northern Dynasty’s drilling more than doubled the size of the Pebble deposit, outlining the largest gold deposit in North America and one of the largest in the world.
Investors have only begun to appreciate the value of this massive deposit – one of the few undeveloped gold deposits large enough to interest even the largest mining companies.
Studies are presently underway to evaluate the profit-making potential of this vast deposit. If the results come even close to meeting expectations, then investors and major mining companies will realize that Pebble is worth a multiple of the value presently attributed to the shares of Northern Dynasty.
Last June, I expressed strong optimism that Northern Dynasty would successfully upgrade the Pebble project. I am just as confident now that the company will continue to add value to the project and that it will attract the interest of the major mining companies.
Consider these reasons for believing that Northern Dynasty will justify a substantially higher value:
The Pebble deposit is one of the largest undeveloped gold deposits in the world, one of the few that is big enough to have a significant impact on the bottom line of even the largest mining companies.
Major mining companies are facing a pressing need to acquire and develop new deposits to replace reserves that are being steadily depleted. Little effort was devoted to finding new deposits during the period of record low metal prices, and those companies now have to catch up quickly.
Pebble has many advantages that would contribute to a very low cost operation.
The Pebble deposit has already had the benefit of more than a decade of testing and engineering studies, providing a basis from which to evaluate the project.
Located in the United States, Pebble offers political and currency advantages available in few other large, advanced deposits.
While investors are awaiting the results of comprehensive independent studies, comparisons with similar projects and informal estimates suggest that the value of the project is substantially higher than the value reflected in the current share price.
Northern Dynasty shares reflect a mere $8 per ounce of gold in the ground in the form of inferred resources. Comparable projects reflect valuations up to several times that level.
I must emphasize that at this stage the project has only inferred resources, and there is no guarantee that the results will continue to be positive. However, over the next few pages I will detail why I believe that Northern Dynasty will successfully advance the Pebble project through the next stage in the development cycle … and gain enormous value.
But first, it’s worth understanding a little more about the background of the project. The first question to look at is…
How Did Northern Dynasty Secure Such A Treasure?
By 1997, Cominco Ltd. (now Teck Cominco Limited) had spent a decade working on the Pebble deposit and had outlined a massive billion tonne deposit. The major completed preliminary engineering studies that involved all of the elements in developing and operating a mine, including infrastructure, permitting and environmental issues. That work showed Pebble could be successfully developed into a large-scale, long life mining operation.
However, in the face of the declining gold and copper prices after 1997, Cominco focused its efforts on maintaining its position as the number one zinc company in the world. The Pebble project was put on hold and no further work was carried out over the next four years.
The Search For Major Company-Sized Projects
Northern Dynasty is managed by Hunter Dickinson Inc., a highly qualified team of management, exploration and mine development professionals. Anybody not already familiar with the background and track record of this successful group should refer to the sidebar (below).
HDI’s attraction to porphyry gold-copper deposits goes well beyond their previous successes and their considerable expertise with that type of geology. The real driving force is that porphyry deposits are frequently very large. For example, the largest gold producer in the world is the Grasberg mine, an operation based on a large porphyry deposit.
Its also significant that one of latest large gold mines to be developed was Newmont’s Batu Hijau mine, which is based on a porphyry gold-copper deposit on a remote island in Indonesia.
After the wave of mergers that swept through the mining industry over the past few years, those companies are looking for enormous deposits. As a result of their large size potential, porphyry deposits are of tremendous interest to the major mining companies.
Perseverance Pays Off
The Hunter Dickinson team are keenly aware of the importance of large deposits to the majors, and spent years evaluating porphyry projects around the world. The Pebble deposit showed up near the top of the list in 1998.
The group at that time had a relationship with Cominco through another of their companies. But the major had no interest in giving up an interest at that time.
More than three years passed from the first discussions until a deal was finally struck in 2001. It required a 20 year low in the gold price and a corporate decision by Cominco to focus on its core business of zinc to finally convince the major to bring a partner in on Pebble.
Deals That Wouldn’t Happen Today
For the exploration team at Cominco, little money was coming from head office and a joint venture with an aggressive and highly competent junior seemed a good way to finally get some action on the Pebble project.
The major company geologists weren’t particularly optimistic about the Pebble deposit (as they had defined it) but they couldn’t wait to get some drill holes into the numerous highly prospective exploration targets that surrounded the known deposit. Finally, in 2001, HDI executed two agreements with Cominco.
HDI carried out a substantial exploration program that greatly extended the prospective zone. They staked ground to cover the new-found zones, doubling the size of the land package. Hunter Dickinson then transferred the project to Northern Dynasty. The management company will receive shares equal to 20% of the appraised value of the project in return for putting the deal together and advancing the project through the first phase of exploration.
The option to purchase the Pebble deposit involved the payment to Cominco of $250,000, 1 million shares and 1.25 million warrants (all paid), plus a final payment of $10 million due in November 2004. Northern Dynasty can satisfy that payment, at its option, by delivering shares with the same value.
Teck Cominco has no back-in right, no royalty and no retained interest. Once Northern Dynasty makes the final payment, the junior will own 100% of the Pebble deposit, with the major owning shares in Northern Dynasty.
Northern Dynasty can earn a 50% interest in the Exploration Lands by completing 60,000 feet of drilling. That requirement has nearly been met and once the option on the Resource Lands has been exercised, Northern Dynasty will vest its interest in the Exploration lands.
After Northern Dynasty vests, the parties will have a 50:50 joint venture on the Exploration Lands outside of the Pebble deposit, with Northern Dynasty as the operator. Cominco can either match the on-going expenditures or sell its interest for $4 million, retaining a 5% net profits interest.
Almost immediately after closing the deal, Cominco merged with Teck Corp. It is highly unlikely that the junior would have pried the project loose from the more diverse mining company that resulted from the merger.
A Leading Team Of Mining Industry Professionals
Northern Dynasty is managed by the Hunter Dickinson group, a very successful team of mining industry professionals. This highly qualified group includes top-level specialists in various fields of geology, mining engineering, finance, management and other mining-related disciplines.
These people are significant owners of the companies for which they work, and that serves as a strong lure to attract some of the best talent in the industry. By sharing the cost among several companies, Northern Dynasty benefits from a talent pool unparalleled in the junior mining field.
The Hunter Dickinson group has already scored two major successes with porphyry deposits: Two similar, but much smaller deposits were sold to major mining companies, generating big payoffs for shareholders of those public companies.
The success of the group derives in large part from the tremendous depth and breadth of geological talent. That talent has been recognized by numerous prestigious awards from colleagues in the mining industry.
Impressive Exploration Success
It is easy to understand why the Cominco geologists wanted to see more action on the Pebble project. The Exploration Lands surrounding the Pebble deposit host an intensive IP (induced polarization) geophysical response coincident with gold and copper geochemical values throughout an area covering 89 square kilometers. The United States Geological Survey ranked this metal-bearing sulphide system as the largest of its kind in the world.
In parallel with work on the Pebble deposit, Northern Dynasty carried out some preliminary drilling on several exploration targets within that vast metal-rich system … and met with extraordinary success.
Less than a month into the first phase of drilling, the company announced the discovery of a new porphyry deposit located 12 kilometers south of Pebble. Before long, they had discovered yet another porphyry deposit and a skarn deposit and had greatly expanded the scope of a high-grade gold discovery.
In short, the junior has already made at least four new discoveries in the Exploration Lands, with several other targets remaining to be tested.
Those impressive results provide a solid base upon which to carry out further drilling. Any (or all!) of these discoveries could develop into additional deposits and thereby multiply the value of the company.
Whatever Northern Dynasty comes up with in the exploration lands would be a bonus to the monster Pebble deposit already in hand.
New Understanding Of The Previous Results At Pebble
Northern Dynasty geologists took a fresh look at the results generated by Cominco on the Pebble deposit. An up-close look at the intensity and the high quality of work being carried out by the Hunter Dickinson geological team provides a lot of confidence in the potential of the project.
For example, I spent a half day around the core logging facility and the warehouse in Iliamna in the presence of Dr. John Payne. With 36 years of exploration experience following completion of his Ph.D. in geology, Dr. Payne is recognized as an authority on this type of deposit. Dr. Payne and other senior geologists spent a considerable amount of time on site re-examining the drill core produced by the major prior to the Northern Dynasty drilling.
The Northern Dynasty team were intent on unraveling the geological subtleties of the Pebble deposit as a basis for expanding the size of the deposit and improving the grade. That understanding was the basis for last summer’s extremely successful drilling program.
Outlining North America’s Largest Gold Deposit
Guided by a comprehensive geological understanding, the 2003 drilling program succeeded in expanding the Pebble deposit laterally and to depth. Most importantly, a large area with a more favorable grade was outlined.
The overall deposit size was increased to a massive 2.7 billion tonnes, well into the ranks of the largest metal deposits in the world. The average grade, using a cut-off of 0.30% copper equivalent, is 0.27% copper, 0.015% molybdenum and 0.30 grams per ton gold. Those figures represent a contained 16.5 billion pounds of copper and 26.5 million ounces of gold. No deposit in North America contains more gold.
Within that vast deposit are zones with a higher average grade, a world-class deposit in its own right, and large enough to support many years of production.
How Does Pebble Compare To Other Deposits?
It is useful to compare Pebble with similar deposits. The table shows three deposits that were developed over the past few years. Even at the lower metal prices that prevailed a couple of years ago, those mines were repaying capital costs and generating substantial profits. Of course now, with the higher metal prices, their profits are even higher.
Another good comparison is the Highland Valley mine of Teck Cominco, located in British Columbia. After 20 years of operations, ore is being drawn from a considerable depth in the open pits. Yet Highland Valley generated C$88 million dollars of operating profit last year from ore that carries only 0.40% copper with only minimal by-product credits.
The grade that generated substantial profits at Highland Valley is the same as the copper grade in the favorable potion of the Pebble deposit. But, in addition to the copper, Pebble carries a half gram of gold per tonne. In essence, one can visualize that if the copper grade generates a profit on its own, then the gold would come as a bonus. As we will see in more detail in a moment, Pebble is projected to produce up to 790,000 ounces of gold per year. That production level would rank Pebble among the world’s largest gold producers.
High Profile Comparison
Another useful comparison is with Ivanhoe Mines’ Oyu Tolgoi (Turquoise Hill) copper-gold deposit in Mongolia. Turquoise Hill hosts a resource that totals 3.1 billion tonnes, with a somewhat higher copper grade but a considerably lower gold content than Pebble.
A recently completed scoping study outlined the potential for a large-scale mining operation at Turquoise Hill on a similar scale to that envisioned for Pebble. Very significantly, the mining costs at Turquoise Hill are likely to be higher than Pebble, as the Mongolian operation would move to underground mining after the first five years.
The Ivanhoe scoping study estimated a net present value (discounted 7.5%) of $1.85 billion, based on $400 gold and $1 copper. The current market value of Ivanhoe represents 86% of that estimated value. (Ivanhoe has other assets, but the value of Turquoise Hill is materially greater than the value of the other assets, which collectively lost money in the past year.)
Potential For A Large Mining Operation
Engineering studies that will estimate capital and operating costs for the Pebble project will be completed later in the year. In the meantime, we can get a first approximation based on other operations.
In an earlier life, I worked for Cominco Ltd as an in-house mining analyst. I was actually involved in the studies that led to the initial acquisition and development of the Valley Copper portion of the Highland Valley mining operation, referenced above.
My due diligence on Pebble Project included a comparison of capital and operating costs with the actual figures from other operating mines. In my judgment, the figures are reasonable approximations of the operating and capital costs to be expected.
My figures suggest the potential for a very large mining operation. At a throughput rate of 180,000 tonnes per day, Pebble, in the first seven years, would produce 523 million pounds of copper and 790,000 ounces of gold per year. Those figures would decline by about one-third after moving on from the higher grade portion of the deposit. At that production rate, the mine would consume less than half of the huge Pebble deposit in the first 20 years of its life.
I must emphasize that these figures are merely first approximations and a lot more work is required to generate meaningful numbers.
The figures are interesting in that they demonstrate that if everything checks out then Pebble could have a value similar to Turquoise Hill. While shares of Ivanhoe trade at 86% of the estimated net present value of its flagship project, Northern Dynasty trades at a fraction of the potential value of Pebble.
It is reasonable to expect that the value of Northern Dynasty will move closer to the asset value as the project progresses through the development cycle over the coming months.
An operation that size would be large enough to have a substantial impact on even the largest mining company.
A Low-Cost Operation
There are several favorable factors that would make Pebble an extremely low-cost mining operation. For example, the project is well located, at a low elevation in an area of gently rolling hills, not far from a proposed ocean port. The area has a moderate climate. The preliminary metallurgy is favorable, with test work indicating excellent recoveries, at least in line with similar deposits.
Very significantly, the Pebble deposit would have an extremely low stripping ratio – only a thin layer of gravel would need to be removed to expose a vast and nearly continuous mineralized zone. Only minimal internal waste would need to be removed. In total, the stripping ratio is expected to be significantly lower than most other major mines, resulting in a very large cost advantage.
Furthermore, the enormous scale of the operation would contribute to a low unit operating cost.
When you put it all together, Pebble has the potential to produce metal and profits at a level that would be attractive to any of the major mining companies.
Once a scoping study determines estimates of capital and operating costs, investors and major mining companies will begin to appreciate that Pebble has the potential to turn out profits in line with its massive size.
The Figures Could Be Even Better
With a very favorable setting, a low stripping ratio and favorable metallurgy, a large-scale mining operation at Pebble is projected to have low operating costs.
While the figures look very attractive, the project could look even better. For example, Cominco in its early work assumed that they would pay for 100% of the costs of all of the infrastructure. A reduction in capital cost for infrastructure would have a big impact on the projected rate of return.
Strong Local Support
Mining has been an important part of the Alaskan economy since the inception of the state. The present government in Alaska and most Alaskan residents are very supportive of mining. A recent announcement provides tangible evidence of that support as applied to the Pebble project.
The Alaska Department of Transportation and Public Facilities has just engaged a local engineering firm to carry out a reconnaissance engineering study of possible road routes that would link the Pebble deposit to Cook Inlet. That study will consider potential port sites on the Inlet. The engineers have also been asked to incorporate potential power supplies in the evaluation of the road route.
That road would improve access for several communities in the area and open up a big region to improved economic activity. It would immediately provide a considerable benefit to the Pebble project.
The study, expected to be completed by the end of the year, demonstrates the tangible nature of the government support for the project.
New Discoveries Will Be Advanced
As in-fill drilling proceeds on the Pebble deposit, Northern Dynasty will also follow up on the four discoveries made last year and test additional targets to find out what else lies hidden beneath the shallow cover.
The focus will be on finding more high-grade material that would serve as a “sweetener” to the massive Pebble deposit. At least a couple of areas that were drilled last summer returned values indicating that substantial high grade zones could be present.
From the perspective of a major mining company, Pebble is even more interesting because it may represent a district capable of supporting more than one large mining operation.
Political And Currency Benefits Of A U.S.-Based Project
There are enormous advantages to developing and operating a major mining operation in the United States. The most obvious is the political stability. Any company that develops the Pebble deposit would see the advantages of investing money in the United States as opposed to many developing nations.
There is also a currency benefit. You see, a portion of the gain in the gold price over the past couple of years has been due to a fall in the value of the U.S. dollar. Gold producers in some other countries have actually seen a fall in the gold price when measured in local currency terms, which puts a squeeze on of profits. Mining companies that pay their expenses in U.S. dollars receive the full benefit of the gold price gain.
Setting the Record Straight
The Pebble project has advanced faster than observers are able to adjust their thinking. As a result, the project is surrounded by out-of-date, inaccurate or just plain wrong perceptions and opinions. Its worth set the record straight on several important factors.
Grade: The Pebble deposit contains substantial grades of gold, molybdenum and copper, all of which will contribute revenue. Projects with similar grades were developed over the past few years, with the lower metal prices that prevailed then. The grade at Pebble is substantially higher than for some other mines that are currently producing big profits.
Location: The project is not remote. It is located in southern Alaska, only 75 miles from tidewater along a proposed road route to a deep-sea port on Cook Inlet. The city of Anchorage sits at the head of Cook Inlet. The town of Iliamna, only 15 miles from the project, is served by scheduled flights from Anchorage. State funded engineering studies are already under way with regard to a road and port.
Topography: The Pebble district is located in a region of low rolling hills, with an average elevation of only 1,000 feet above sea level. Those glacier covered mountains in the tourist brochures are in a different part of Alaska.
Climate: The Pebble project enjoys a more favorable climate than much of the north-central United States. Winter weather is more like northern Nevada than most people's perceptions of Alaska, with only modest snowfall and winter temperatures typically 0 to 15 degrees Fahrenheit. In short, there are absolutely no impediments to year-round operation.
Infrastructure: The Alaska government that was elected last year is extremely supportive of mining. The government and other groups within the state have provided funding for the construction of facilities and infrastructure for similar large scale projects in Alaska (roads, docks and power projects).
Geological and management talent: Northern Dynasty shares one of the best pools of geological and management talent in the mining industry. They supplement that talent by engaging the best contractors and consultants available. The resource estimate was prepared by a highly regarded independent engineering company.
Ownership: Northern Dynasty holds options to buy a 100% interest in the property encompassing the presently defined Pebble deposit, and an option to earn 50% of the surrounding Exploration Lands. In essence, the company has control over an entire mineral district. The company has until November 2004 to pay $10 million to exercise the option to purchase the Pebble deposit.
Northern Dynasty can satisfy the payment requirement by delivering shares, at its option. Once Northern Dynasty exercises the Pebble option, the company will own the Pebble deposit outright. Teck Cominco Limited, the vendor, will have no retained interest, no royalty and no back-in right. Period.
Massive Leverage To Gold
Northern Dynasty offers tremendous upside potential based on the deposit already in hand and at today's gold and copper prices. This company also offers tremendous leverage to further increases in the copper and gold prices.
Each share of Northern Dynasty on a fully diluted basis, is effectively backed by 393 pounds of copper and 0.64 of an ounce of gold in the ground.
With that massive exposure, further metal price gains could have an enormous impact on the value of Northern Dynasty shares.
The Upside Potential Is Already In Hand
Engineering studies now underway will provide a first approximation of the value of the Pebble deposit. That work will incorporate estimates of capital and operating costs derived by the engineering consultants.
At present the Pebble deposit is classed as an inferred resource as it is defined by widely spaced drilling. Over the summer, the company will carry out drilling to fill in the spaces between the drill holes and increase the confidence level in the resource estimate. If the drill results bear out the earlier work, then a substantial portion of the inferred resource should be elevated to the measured and indicated categories over the course of this year.
Investors generally attribute an average value in excess of $40 per ounce to a measured and indicated resource.
Even taking into account that not all of the ounces of inferred resource make it into the measured and indicated category, there is considerable upside potential, as Northern Dynasty is now valued at less than $8 per ounce of inferred resource.
(Note that no value is attributed to the copper in this analysis. Instead, the value of the copper is treated as an offset to the cost of producing gold. It should be noted that the Pebble Deposit in addition to being the largest gold deposit in North America at the same time is the continent’s second largest copper deposit.)
I believe that the project will proceed successfully through the development cycle and as the project advances, the value will move up in line with similar projects. If I am right, then investors who take action now stand to realize significant gains.
An Opportunity Not To Be Missed
The mining industry is emerging from a period of low prices when little effort was devoted to replacing deposits.
The majors are now aggressively seeking new deposits to replace the reserves that are being steadily depleted.
There are very few undeveloped deposits anywhere in the world as large as Pebble, and no others in North America. This deposit is especially appealing because it comes with a district-scale exploration play, making it almost unique. The validity of the Exploration Lands have already been demonstrated with the discovery of four additional deposits in the course of testing only a portion of the district.
The largest of the mining majors need big plays like Pebble to have a meaningful impact. It is almost a foregone conclusion that a project as attractive as Pebble will ultimately be acquired by a major. It is just a matter of when…
My estimate is that the bidding will begin late in 2004. By that time, the project will be far enough along that Northern Dynasty and the interested parties will be able to make meaningful estimates of the value of the project.
Major mining companies have paid cash in the order of hundreds of millions of dollars in previous porphyry deposit acquisitions. Examples include the two previous Hunter Dickinson deals. Another example is International Musto, which held a 50% interest in the Alumbrera deposit in Argentina and was bought for C$510 million. In addition, Barrick paid more than C$1 billion to acquire Arequipa for its Pierina deposit in Peru.
Currently, Southwestern Resources, that has a new gold discovery in China, is presently trading at C$38 a share, giving it a value of C$768 million, as investors bet that majors will bid for that company.
A Time To Act
Investors who act now likely won’t have to wait for a takeover bid to see a payoff. Northern Dynasty’s Pebble deposit is hardly a secret, but very few investors yet appreciate the fundamental changes over the past few months that have dramatically added to the value of the project.
At the present share price, investors are effectively getting gold in the ground for only $8 an ounce.
That kind of valuation isn’t likely to last for long. Growing investor awareness should begin to propel the share price. Work on the project over the coming months is likely to open a few eyes and begin to push the share price closer to the potential value.
Over the course of this year, drill results from the Pebble deposit plus the four new discoveries that were made in 2002 plus the other exploration targets will provide a steady stream of news that should continue to move the market
I encourage you to act quickly as this company will be getting a lot of attention in the coming weeks.
Price February 16, 2004: $8.75
Shares Outstanding: 31.8 million
Market Cap: $ 278.3 million
Shares fully diluted: 41.5 million
Contact: Bruce Youngman
800-667-2114
www.northerndynasty.com
and
It's Very Real
This Special Issue of Resource Opportunities
is devoted to Northern Dynasty Minerals
(NDM-TSXV; NDMLF-OTCBB)
See bottom for important disclosure information
Northern Dynasty recently established its Pebble project as the largest gold deposit in North America.
At the present share price, this company is valued at a mere $8 per ounce of inferred resource, a fraction of the potential value of that vast deposit.
As the Pebble project advances over the coming months, and as investors gain a greater appreciation of the merits of the project, the valuation should move up in line with similar projects, generating the potential for big returns to investors.
Northern Dynasty optioned the massive Pebble gold-copper deposit in Alaska from a major mining company three years ago, while the gold price was at a 20 year low. They saw tremendous potential to expand an already huge deposit and discover an entire district of a new deposits.
The results exceeded even the most optimistic expectations. Northern Dynasty’s drilling more than doubled the size of the Pebble deposit, outlining the largest gold deposit in North America and one of the largest in the world.
Investors have only begun to appreciate the value of this massive deposit – one of the few undeveloped gold deposits large enough to interest even the largest mining companies.
Studies are presently underway to evaluate the profit-making potential of this vast deposit. If the results come even close to meeting expectations, then investors and major mining companies will realize that Pebble is worth a multiple of the value presently attributed to the shares of Northern Dynasty.
Last June, I expressed strong optimism that Northern Dynasty would successfully upgrade the Pebble project. I am just as confident now that the company will continue to add value to the project and that it will attract the interest of the major mining companies.
Consider these reasons for believing that Northern Dynasty will justify a substantially higher value:
The Pebble deposit is one of the largest undeveloped gold deposits in the world, one of the few that is big enough to have a significant impact on the bottom line of even the largest mining companies.
Major mining companies are facing a pressing need to acquire and develop new deposits to replace reserves that are being steadily depleted. Little effort was devoted to finding new deposits during the period of record low metal prices, and those companies now have to catch up quickly.
Pebble has many advantages that would contribute to a very low cost operation.
The Pebble deposit has already had the benefit of more than a decade of testing and engineering studies, providing a basis from which to evaluate the project.
Located in the United States, Pebble offers political and currency advantages available in few other large, advanced deposits.
While investors are awaiting the results of comprehensive independent studies, comparisons with similar projects and informal estimates suggest that the value of the project is substantially higher than the value reflected in the current share price.
Northern Dynasty shares reflect a mere $8 per ounce of gold in the ground in the form of inferred resources. Comparable projects reflect valuations up to several times that level.
I must emphasize that at this stage the project has only inferred resources, and there is no guarantee that the results will continue to be positive. However, over the next few pages I will detail why I believe that Northern Dynasty will successfully advance the Pebble project through the next stage in the development cycle … and gain enormous value.
But first, it’s worth understanding a little more about the background of the project. The first question to look at is…
How Did Northern Dynasty Secure Such A Treasure?
By 1997, Cominco Ltd. (now Teck Cominco Limited) had spent a decade working on the Pebble deposit and had outlined a massive billion tonne deposit. The major completed preliminary engineering studies that involved all of the elements in developing and operating a mine, including infrastructure, permitting and environmental issues. That work showed Pebble could be successfully developed into a large-scale, long life mining operation.
However, in the face of the declining gold and copper prices after 1997, Cominco focused its efforts on maintaining its position as the number one zinc company in the world. The Pebble project was put on hold and no further work was carried out over the next four years.
The Search For Major Company-Sized Projects
Northern Dynasty is managed by Hunter Dickinson Inc., a highly qualified team of management, exploration and mine development professionals. Anybody not already familiar with the background and track record of this successful group should refer to the sidebar (below).
HDI’s attraction to porphyry gold-copper deposits goes well beyond their previous successes and their considerable expertise with that type of geology. The real driving force is that porphyry deposits are frequently very large. For example, the largest gold producer in the world is the Grasberg mine, an operation based on a large porphyry deposit.
Its also significant that one of latest large gold mines to be developed was Newmont’s Batu Hijau mine, which is based on a porphyry gold-copper deposit on a remote island in Indonesia.
After the wave of mergers that swept through the mining industry over the past few years, those companies are looking for enormous deposits. As a result of their large size potential, porphyry deposits are of tremendous interest to the major mining companies.
Perseverance Pays Off
The Hunter Dickinson team are keenly aware of the importance of large deposits to the majors, and spent years evaluating porphyry projects around the world. The Pebble deposit showed up near the top of the list in 1998.
The group at that time had a relationship with Cominco through another of their companies. But the major had no interest in giving up an interest at that time.
More than three years passed from the first discussions until a deal was finally struck in 2001. It required a 20 year low in the gold price and a corporate decision by Cominco to focus on its core business of zinc to finally convince the major to bring a partner in on Pebble.
Deals That Wouldn’t Happen Today
For the exploration team at Cominco, little money was coming from head office and a joint venture with an aggressive and highly competent junior seemed a good way to finally get some action on the Pebble project.
The major company geologists weren’t particularly optimistic about the Pebble deposit (as they had defined it) but they couldn’t wait to get some drill holes into the numerous highly prospective exploration targets that surrounded the known deposit. Finally, in 2001, HDI executed two agreements with Cominco.
HDI carried out a substantial exploration program that greatly extended the prospective zone. They staked ground to cover the new-found zones, doubling the size of the land package. Hunter Dickinson then transferred the project to Northern Dynasty. The management company will receive shares equal to 20% of the appraised value of the project in return for putting the deal together and advancing the project through the first phase of exploration.
The option to purchase the Pebble deposit involved the payment to Cominco of $250,000, 1 million shares and 1.25 million warrants (all paid), plus a final payment of $10 million due in November 2004. Northern Dynasty can satisfy that payment, at its option, by delivering shares with the same value.
Teck Cominco has no back-in right, no royalty and no retained interest. Once Northern Dynasty makes the final payment, the junior will own 100% of the Pebble deposit, with the major owning shares in Northern Dynasty.
Northern Dynasty can earn a 50% interest in the Exploration Lands by completing 60,000 feet of drilling. That requirement has nearly been met and once the option on the Resource Lands has been exercised, Northern Dynasty will vest its interest in the Exploration lands.
After Northern Dynasty vests, the parties will have a 50:50 joint venture on the Exploration Lands outside of the Pebble deposit, with Northern Dynasty as the operator. Cominco can either match the on-going expenditures or sell its interest for $4 million, retaining a 5% net profits interest.
Almost immediately after closing the deal, Cominco merged with Teck Corp. It is highly unlikely that the junior would have pried the project loose from the more diverse mining company that resulted from the merger.
A Leading Team Of Mining Industry Professionals
Northern Dynasty is managed by the Hunter Dickinson group, a very successful team of mining industry professionals. This highly qualified group includes top-level specialists in various fields of geology, mining engineering, finance, management and other mining-related disciplines.
These people are significant owners of the companies for which they work, and that serves as a strong lure to attract some of the best talent in the industry. By sharing the cost among several companies, Northern Dynasty benefits from a talent pool unparalleled in the junior mining field.
The Hunter Dickinson group has already scored two major successes with porphyry deposits: Two similar, but much smaller deposits were sold to major mining companies, generating big payoffs for shareholders of those public companies.
The success of the group derives in large part from the tremendous depth and breadth of geological talent. That talent has been recognized by numerous prestigious awards from colleagues in the mining industry.
Impressive Exploration Success
It is easy to understand why the Cominco geologists wanted to see more action on the Pebble project. The Exploration Lands surrounding the Pebble deposit host an intensive IP (induced polarization) geophysical response coincident with gold and copper geochemical values throughout an area covering 89 square kilometers. The United States Geological Survey ranked this metal-bearing sulphide system as the largest of its kind in the world.
In parallel with work on the Pebble deposit, Northern Dynasty carried out some preliminary drilling on several exploration targets within that vast metal-rich system … and met with extraordinary success.
Less than a month into the first phase of drilling, the company announced the discovery of a new porphyry deposit located 12 kilometers south of Pebble. Before long, they had discovered yet another porphyry deposit and a skarn deposit and had greatly expanded the scope of a high-grade gold discovery.
In short, the junior has already made at least four new discoveries in the Exploration Lands, with several other targets remaining to be tested.
Those impressive results provide a solid base upon which to carry out further drilling. Any (or all!) of these discoveries could develop into additional deposits and thereby multiply the value of the company.
Whatever Northern Dynasty comes up with in the exploration lands would be a bonus to the monster Pebble deposit already in hand.
New Understanding Of The Previous Results At Pebble
Northern Dynasty geologists took a fresh look at the results generated by Cominco on the Pebble deposit. An up-close look at the intensity and the high quality of work being carried out by the Hunter Dickinson geological team provides a lot of confidence in the potential of the project.
For example, I spent a half day around the core logging facility and the warehouse in Iliamna in the presence of Dr. John Payne. With 36 years of exploration experience following completion of his Ph.D. in geology, Dr. Payne is recognized as an authority on this type of deposit. Dr. Payne and other senior geologists spent a considerable amount of time on site re-examining the drill core produced by the major prior to the Northern Dynasty drilling.
The Northern Dynasty team were intent on unraveling the geological subtleties of the Pebble deposit as a basis for expanding the size of the deposit and improving the grade. That understanding was the basis for last summer’s extremely successful drilling program.
Outlining North America’s Largest Gold Deposit
Guided by a comprehensive geological understanding, the 2003 drilling program succeeded in expanding the Pebble deposit laterally and to depth. Most importantly, a large area with a more favorable grade was outlined.
The overall deposit size was increased to a massive 2.7 billion tonnes, well into the ranks of the largest metal deposits in the world. The average grade, using a cut-off of 0.30% copper equivalent, is 0.27% copper, 0.015% molybdenum and 0.30 grams per ton gold. Those figures represent a contained 16.5 billion pounds of copper and 26.5 million ounces of gold. No deposit in North America contains more gold.
Within that vast deposit are zones with a higher average grade, a world-class deposit in its own right, and large enough to support many years of production.
How Does Pebble Compare To Other Deposits?
It is useful to compare Pebble with similar deposits. The table shows three deposits that were developed over the past few years. Even at the lower metal prices that prevailed a couple of years ago, those mines were repaying capital costs and generating substantial profits. Of course now, with the higher metal prices, their profits are even higher.
Another good comparison is the Highland Valley mine of Teck Cominco, located in British Columbia. After 20 years of operations, ore is being drawn from a considerable depth in the open pits. Yet Highland Valley generated C$88 million dollars of operating profit last year from ore that carries only 0.40% copper with only minimal by-product credits.
The grade that generated substantial profits at Highland Valley is the same as the copper grade in the favorable potion of the Pebble deposit. But, in addition to the copper, Pebble carries a half gram of gold per tonne. In essence, one can visualize that if the copper grade generates a profit on its own, then the gold would come as a bonus. As we will see in more detail in a moment, Pebble is projected to produce up to 790,000 ounces of gold per year. That production level would rank Pebble among the world’s largest gold producers.
High Profile Comparison
Another useful comparison is with Ivanhoe Mines’ Oyu Tolgoi (Turquoise Hill) copper-gold deposit in Mongolia. Turquoise Hill hosts a resource that totals 3.1 billion tonnes, with a somewhat higher copper grade but a considerably lower gold content than Pebble.
A recently completed scoping study outlined the potential for a large-scale mining operation at Turquoise Hill on a similar scale to that envisioned for Pebble. Very significantly, the mining costs at Turquoise Hill are likely to be higher than Pebble, as the Mongolian operation would move to underground mining after the first five years.
The Ivanhoe scoping study estimated a net present value (discounted 7.5%) of $1.85 billion, based on $400 gold and $1 copper. The current market value of Ivanhoe represents 86% of that estimated value. (Ivanhoe has other assets, but the value of Turquoise Hill is materially greater than the value of the other assets, which collectively lost money in the past year.)
Potential For A Large Mining Operation
Engineering studies that will estimate capital and operating costs for the Pebble project will be completed later in the year. In the meantime, we can get a first approximation based on other operations.
In an earlier life, I worked for Cominco Ltd as an in-house mining analyst. I was actually involved in the studies that led to the initial acquisition and development of the Valley Copper portion of the Highland Valley mining operation, referenced above.
My due diligence on Pebble Project included a comparison of capital and operating costs with the actual figures from other operating mines. In my judgment, the figures are reasonable approximations of the operating and capital costs to be expected.
My figures suggest the potential for a very large mining operation. At a throughput rate of 180,000 tonnes per day, Pebble, in the first seven years, would produce 523 million pounds of copper and 790,000 ounces of gold per year. Those figures would decline by about one-third after moving on from the higher grade portion of the deposit. At that production rate, the mine would consume less than half of the huge Pebble deposit in the first 20 years of its life.
I must emphasize that these figures are merely first approximations and a lot more work is required to generate meaningful numbers.
The figures are interesting in that they demonstrate that if everything checks out then Pebble could have a value similar to Turquoise Hill. While shares of Ivanhoe trade at 86% of the estimated net present value of its flagship project, Northern Dynasty trades at a fraction of the potential value of Pebble.
It is reasonable to expect that the value of Northern Dynasty will move closer to the asset value as the project progresses through the development cycle over the coming months.
An operation that size would be large enough to have a substantial impact on even the largest mining company.
A Low-Cost Operation
There are several favorable factors that would make Pebble an extremely low-cost mining operation. For example, the project is well located, at a low elevation in an area of gently rolling hills, not far from a proposed ocean port. The area has a moderate climate. The preliminary metallurgy is favorable, with test work indicating excellent recoveries, at least in line with similar deposits.
Very significantly, the Pebble deposit would have an extremely low stripping ratio – only a thin layer of gravel would need to be removed to expose a vast and nearly continuous mineralized zone. Only minimal internal waste would need to be removed. In total, the stripping ratio is expected to be significantly lower than most other major mines, resulting in a very large cost advantage.
Furthermore, the enormous scale of the operation would contribute to a low unit operating cost.
When you put it all together, Pebble has the potential to produce metal and profits at a level that would be attractive to any of the major mining companies.
Once a scoping study determines estimates of capital and operating costs, investors and major mining companies will begin to appreciate that Pebble has the potential to turn out profits in line with its massive size.
The Figures Could Be Even Better
With a very favorable setting, a low stripping ratio and favorable metallurgy, a large-scale mining operation at Pebble is projected to have low operating costs.
While the figures look very attractive, the project could look even better. For example, Cominco in its early work assumed that they would pay for 100% of the costs of all of the infrastructure. A reduction in capital cost for infrastructure would have a big impact on the projected rate of return.
Strong Local Support
Mining has been an important part of the Alaskan economy since the inception of the state. The present government in Alaska and most Alaskan residents are very supportive of mining. A recent announcement provides tangible evidence of that support as applied to the Pebble project.
The Alaska Department of Transportation and Public Facilities has just engaged a local engineering firm to carry out a reconnaissance engineering study of possible road routes that would link the Pebble deposit to Cook Inlet. That study will consider potential port sites on the Inlet. The engineers have also been asked to incorporate potential power supplies in the evaluation of the road route.
That road would improve access for several communities in the area and open up a big region to improved economic activity. It would immediately provide a considerable benefit to the Pebble project.
The study, expected to be completed by the end of the year, demonstrates the tangible nature of the government support for the project.
New Discoveries Will Be Advanced
As in-fill drilling proceeds on the Pebble deposit, Northern Dynasty will also follow up on the four discoveries made last year and test additional targets to find out what else lies hidden beneath the shallow cover.
The focus will be on finding more high-grade material that would serve as a “sweetener” to the massive Pebble deposit. At least a couple of areas that were drilled last summer returned values indicating that substantial high grade zones could be present.
From the perspective of a major mining company, Pebble is even more interesting because it may represent a district capable of supporting more than one large mining operation.
Political And Currency Benefits Of A U.S.-Based Project
There are enormous advantages to developing and operating a major mining operation in the United States. The most obvious is the political stability. Any company that develops the Pebble deposit would see the advantages of investing money in the United States as opposed to many developing nations.
There is also a currency benefit. You see, a portion of the gain in the gold price over the past couple of years has been due to a fall in the value of the U.S. dollar. Gold producers in some other countries have actually seen a fall in the gold price when measured in local currency terms, which puts a squeeze on of profits. Mining companies that pay their expenses in U.S. dollars receive the full benefit of the gold price gain.
Setting the Record Straight
The Pebble project has advanced faster than observers are able to adjust their thinking. As a result, the project is surrounded by out-of-date, inaccurate or just plain wrong perceptions and opinions. Its worth set the record straight on several important factors.
Grade: The Pebble deposit contains substantial grades of gold, molybdenum and copper, all of which will contribute revenue. Projects with similar grades were developed over the past few years, with the lower metal prices that prevailed then. The grade at Pebble is substantially higher than for some other mines that are currently producing big profits.
Location: The project is not remote. It is located in southern Alaska, only 75 miles from tidewater along a proposed road route to a deep-sea port on Cook Inlet. The city of Anchorage sits at the head of Cook Inlet. The town of Iliamna, only 15 miles from the project, is served by scheduled flights from Anchorage. State funded engineering studies are already under way with regard to a road and port.
Topography: The Pebble district is located in a region of low rolling hills, with an average elevation of only 1,000 feet above sea level. Those glacier covered mountains in the tourist brochures are in a different part of Alaska.
Climate: The Pebble project enjoys a more favorable climate than much of the north-central United States. Winter weather is more like northern Nevada than most people's perceptions of Alaska, with only modest snowfall and winter temperatures typically 0 to 15 degrees Fahrenheit. In short, there are absolutely no impediments to year-round operation.
Infrastructure: The Alaska government that was elected last year is extremely supportive of mining. The government and other groups within the state have provided funding for the construction of facilities and infrastructure for similar large scale projects in Alaska (roads, docks and power projects).
Geological and management talent: Northern Dynasty shares one of the best pools of geological and management talent in the mining industry. They supplement that talent by engaging the best contractors and consultants available. The resource estimate was prepared by a highly regarded independent engineering company.
Ownership: Northern Dynasty holds options to buy a 100% interest in the property encompassing the presently defined Pebble deposit, and an option to earn 50% of the surrounding Exploration Lands. In essence, the company has control over an entire mineral district. The company has until November 2004 to pay $10 million to exercise the option to purchase the Pebble deposit.
Northern Dynasty can satisfy the payment requirement by delivering shares, at its option. Once Northern Dynasty exercises the Pebble option, the company will own the Pebble deposit outright. Teck Cominco Limited, the vendor, will have no retained interest, no royalty and no back-in right. Period.
Massive Leverage To Gold
Northern Dynasty offers tremendous upside potential based on the deposit already in hand and at today's gold and copper prices. This company also offers tremendous leverage to further increases in the copper and gold prices.
Each share of Northern Dynasty on a fully diluted basis, is effectively backed by 393 pounds of copper and 0.64 of an ounce of gold in the ground.
With that massive exposure, further metal price gains could have an enormous impact on the value of Northern Dynasty shares.
The Upside Potential Is Already In Hand
Engineering studies now underway will provide a first approximation of the value of the Pebble deposit. That work will incorporate estimates of capital and operating costs derived by the engineering consultants.
At present the Pebble deposit is classed as an inferred resource as it is defined by widely spaced drilling. Over the summer, the company will carry out drilling to fill in the spaces between the drill holes and increase the confidence level in the resource estimate. If the drill results bear out the earlier work, then a substantial portion of the inferred resource should be elevated to the measured and indicated categories over the course of this year.
Investors generally attribute an average value in excess of $40 per ounce to a measured and indicated resource.
Even taking into account that not all of the ounces of inferred resource make it into the measured and indicated category, there is considerable upside potential, as Northern Dynasty is now valued at less than $8 per ounce of inferred resource.
(Note that no value is attributed to the copper in this analysis. Instead, the value of the copper is treated as an offset to the cost of producing gold. It should be noted that the Pebble Deposit in addition to being the largest gold deposit in North America at the same time is the continent’s second largest copper deposit.)
I believe that the project will proceed successfully through the development cycle and as the project advances, the value will move up in line with similar projects. If I am right, then investors who take action now stand to realize significant gains.
An Opportunity Not To Be Missed
The mining industry is emerging from a period of low prices when little effort was devoted to replacing deposits.
The majors are now aggressively seeking new deposits to replace the reserves that are being steadily depleted.
There are very few undeveloped deposits anywhere in the world as large as Pebble, and no others in North America. This deposit is especially appealing because it comes with a district-scale exploration play, making it almost unique. The validity of the Exploration Lands have already been demonstrated with the discovery of four additional deposits in the course of testing only a portion of the district.
The largest of the mining majors need big plays like Pebble to have a meaningful impact. It is almost a foregone conclusion that a project as attractive as Pebble will ultimately be acquired by a major. It is just a matter of when…
My estimate is that the bidding will begin late in 2004. By that time, the project will be far enough along that Northern Dynasty and the interested parties will be able to make meaningful estimates of the value of the project.
Major mining companies have paid cash in the order of hundreds of millions of dollars in previous porphyry deposit acquisitions. Examples include the two previous Hunter Dickinson deals. Another example is International Musto, which held a 50% interest in the Alumbrera deposit in Argentina and was bought for C$510 million. In addition, Barrick paid more than C$1 billion to acquire Arequipa for its Pierina deposit in Peru.
Currently, Southwestern Resources, that has a new gold discovery in China, is presently trading at C$38 a share, giving it a value of C$768 million, as investors bet that majors will bid for that company.
A Time To Act
Investors who act now likely won’t have to wait for a takeover bid to see a payoff. Northern Dynasty’s Pebble deposit is hardly a secret, but very few investors yet appreciate the fundamental changes over the past few months that have dramatically added to the value of the project.
At the present share price, investors are effectively getting gold in the ground for only $8 an ounce.
That kind of valuation isn’t likely to last for long. Growing investor awareness should begin to propel the share price. Work on the project over the coming months is likely to open a few eyes and begin to push the share price closer to the potential value.
Over the course of this year, drill results from the Pebble deposit plus the four new discoveries that were made in 2002 plus the other exploration targets will provide a steady stream of news that should continue to move the market
I encourage you to act quickly as this company will be getting a lot of attention in the coming weeks.
Price February 16, 2004: $8.75
Shares Outstanding: 31.8 million
Market Cap: $ 278.3 million
Shares fully diluted: 41.5 million
Contact: Bruce Youngman
800-667-2114
www.northerndynasty.com
invest at your own risk, based on your own due diligence, at your own risk tolerance
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