Northern Dynasty Expects a Takeover of its 50% of the World’s Largest Undeveloped Deposit
By Kevin Michael Grace
“You need a great deal of patience to be in this business,” says Ron Thiessen, President/CEO of Northern Dynasty Minerals Ltd. Especially when your company’s asset will cost over $6B to complete and won’t start producing until 2019. So how does Thiessen square this circle? “It’s unlikely that Northern Dynasty as a separate entity will be there for the development and construction of this project. Pebble’s structure has been built around the end result that we would likely be acquired.”
Pebble is nothing less than the largest undeveloped copper-gold resource in the world. Located on 186 square miles in southwest Alaska, it is controlled and operated by the Anchorage-headquartered Pebble Partnership, with Northern Dynasty holding 50% and London-headquartered Anglo American plc holding 50%. Northern Dynasty is an affiliate of Hunter Dickinson Inc, of which Thiessen is President/CEO.
Pebble was discovered by Cominco in 1986, which identified a billion tonnes of low-grade ore and 60 million tonnes of high-grade. “They ran the numbers and couldn’t make it work,” Thiessen says. In 2001, Northern Dynasty recouped Cominco its investment, $14 million, and set to work. “We like to call HDI a rediscovery company,” Thiessen says. “We felt there was an opportunity in the district to expand those resources and find more high-grade mineralization, and that’s exactly what transpired.”
According to a February 2011 preliminary assessment, Pebble hosts (at a 0.30% copper equivalent cutoff), 5.94 billion tonnes of measured and indicated resources: 55 billion pounds copper, 67 million ounces gold and 3.3 billion pounds molybdenum. Indicated resources are 4.84 billion tonnes: 25.6 billion pounds copper, 40.4 million ounces gold and 2.3 billion pounds molybdenum. There are also substantial resources of palladium, silver and rhenium.
“By early 2006,” Thiessen recalls, “we realized what we had. It was going to take four to six years for Northern Dynasty to reach its goal. A project like this is hardly ever—I can’t think of one example—developed by a junior. They are almost always developed by consortiums of large, diversified companies. If you look at Antamina [the huge Peru copper-zinc deposit], you have BHP Billiton, Xstrata, Teck and Mitsubishi.”
So in 2007, Northern Dynasty brought in Anglo American. Northern Dynasty itself has a major investor in Rio Tinto, which owns 19%. (The six original Hunter Dickinson partners, including Thiessen, own 13% between them.) But Thiessen concedes that Pebble will require more partners.
The February preliminary assessment demonstrates what a massive undertaking Pebble is. Its path to production includes a prefeasibility study by 2012, the completion of permitting by 2015 and the completion of mining facilities by 2019. Initial capital investment will be $4.7 billion, and this does not include offsite infrastructure: $1.4 billion. “For things like the power at Pebble we’re looking to work with a utility company and some of the Native [American] corporations. They’d build the plant, and we’d be the base load.”
Based on a 45-year mine life—which would exhaust only 32% of the mineral resource—Northern Dynasty’s 50% share of Pebble would yield an 18% pre-tax and 15.4% post-tax internal rate of return (IRR), a 4.7-year pre-tax and 5.3-year post-tax payback on initial capital investment and a $3.6 billion pre-tax and $2.4 billion post-tax net present value (NPV) at a 7% discount rate.
These figures are based on $2.50 per pound copper, $1,050 per ounce gold, $13.50 per pound molybdenum and $15 per ounce silver. Based on metals prices as of February 23, however, Pebble becomes much more lucrative, with Northern Dynasty’s 50% yielding a 30.2% pre-tax and 25.1% post-tax IRR, a 2.6-year pre-tax and 3.1-year post-tax payback on initial capital investment and an $8.3 billion pre-tax and $5.6 billion post-tax NPV.
So would it make sense to hurry Pebble to production? “From an accounting point of view,” Thiessen admits. “But the permitting can’t be hurried and shouldn’t be hurried.” Not least because he is determined to retain good relations with Alaska’s Natives. To that end, he points out that Pebble Partnership CEO John Shively was formerly Commissioner of the Alaska Department of Natural Resources and served 17 years with NANA Regional Corporation, the Alaska Native business consortium owned by 12,500 Iñupiat shareholders.
Pebble will create thousands of jobs for Natives, and in response to claims made by some NGOs that Alaska has a soft environmental regulatory regime, Pebble will this year release a 20,000-page, $150-million baseline study. Thiessen promises, “We’ll buy every community in western Alaska computers and give them the report on discs, so they won’t have to struggle with the hard copies.”
So there is no doubt that Pebble has demonstrated the patience Thiessen believes essential. Unfortunately, however, “Investors often tend not to have that kind of patience.” Northern Dynasty’s share price has cratered since the preliminary assessment was released February 23, from a high of $21.50 to $14.14, reducing its market cap to $1.34 billion.
In late February, Mitsubishi sold its 11% of Northern Dynasty for $160 million, indicating to many a collapse of institutional confidence in Pebble. Thiessen sees it differently. He explains, “They acquired a stake in 2007. Japanese trading companies typically invest in projects in return for an offtake agreement. It didn’t work out that way for a number of reasons. We didn’t get things on the road until 2009 and have only now arrived at the economic outcomes. Meanwhile, Mitsubishi needed to raise capital to invest in other mines to get offtake agreements. So they made a strategic decision to sell their stake with a view to coming back to Pebble at some time in the future.”
Indeed, Mitsubishi might even be a candidate to take over Northern Dynasty. Thiessen confirms that his company is a takeover target, probably sooner rather than later: “If another major was to come in, they’d want as much say as Anglo American has.”
And the recent sell-off might make it a more attractive investment. The Motley Fool certainly thinks so. On March 8, its online investment community of 170,000 members selected Northern Dynasty as one of “five stocks approaching greatness.”
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