First Quantum options Northern Dynasty’s Pebble

VANCOUVER — First Quantum Minerals (TSX: FM; US-OTC: FQVLF) is the latest large mining company to place a bet on Northern Dynasty Minerals’ (TSX: NDM; NYSE-AM: NAK) controversial, wholly owned  Pebble copper-gold megaproject in Alaska.

The property sits within the Lake and Peninsula Borough, 321 km southwest of Anchorage, and is often cited as one of the world’s largest undeveloped copper-gold deposits. The project area is also home to some 1,500 people in 18 communities.

On Dec. 18, First Quantum announced an agreement with Northern Dynasty  that grants it an option to earn a 50% stake in Pebble.

Northern Dynasty Minerals’ Pebble copper-gold deposit, 321 km southwest of Anchorage, Alaska. Credit: Northern Dynasty Minerals.

First Quantum would fund US$150 million in the Pebble Ltd. Partnership over four years, with capital earmarked for the U.S. Environmental Protection Agency (EPA) permit process.

The company would then earn an option to form a fifty-fifty joint venture with another US$1.35-billion investment in project development.

“I want to make it quite clear this is an option and we can decide whether to proceed, or not, at any time,” First Quantum chairman and CEO Philip Pascall said during a conference call. “It’s important to note that all the funds in the agreement go directly into project expenditures.

“We’ve delivered valuable growth to our stakeholders over the past 22 years. That growth has not come about, however, without taking calculated risks and thinking unconventionally. We’re aware of the various hurdles standing in the way of this project.”

Pebble hit a snag around three years ago when regulators flexed subsection 404c of the Clean Water Act to claim that mining at the site would cause “significant near- and long-term risk to salmon, wildlife and Native cultures of Alaska.”

Northern Dynasty scored its own victory in May when the EPA lifted the regulatory freeze and allowed the junior company to restart the permit process.

Pascall revealed that he visited Pebble — alongside First Quantum CEO Clive Newall — last year to “better understand the social and technical elements of the project.”

He said that the management team fully understands the regulatory process, and pointed out that the option agreement can be extended by two years under certain circumstances.

A drill rig at Northern Dynasty Minerals’ Pebble copper-gold project in Alaska, in July 2014. Credit: Northern Dynasty Minerals.

“This project can be developed and operated safely. It can coexist with important fishery resources,” Pascall continued. “What’s changed is that Northern Dynasty has come to an agreement with the EPA that allows for an environmental impact statement (EIS) on the project.”

Northern Dynasty is obligated to file permit applications in the next 30 months, while the U.S. Army Corps has four years to complete an EIS on the project.

The most recent technical document on Pebble is a preliminary economic assessment (PEA) filed in 2011.

The study models a 200,000-tonne-per-day operation over 25-, 45- and 75-year mine lives, each with US$4.7 billion in capital expenses. The 75-year mining scenario would result in mining 5.9 billion tonnes of mineralized material grading 0.5% copper, 0.31 gram gold per tonne and 0.024% molybdenum.

Northern Dynasty is exploring smaller mine designs at the project, however, to ease the permitting and development risk.

“We consider the agreement essentially an extension of our exploration programs, but given the extensive work done on the project it requires no further geological search,” Pascall said. “This is a long-term investment that is about finding sustainable growth over the next decade. We’ll be leveraging First Quantum’s experienced technical staff to take a long look at the project.”

Northern Dynasty president and CEO Ron Thiessen said in a statement that the capital contribution will allow his company to “move forward to initiate federal and state permitting in the very near-term.”

Majors Rio Tinto (NYSE: RIO; LON: RIO) and Anglo American (US-OTC: AAUKF; LON: AAL) were formerly involved in Pebble, but walked away four years ago leaving Northern Dynasty as sole owner.

Anglo spent US$541 million over six years via a similar earn-in agreement to spend US$1.43 billion to acquire a 50% stake.

Scotia Capital analyst Orest Wowkodaw has a “sector outperform” rating on First Quantum alongside an $18-per-share target price. He has three concerns with the agreement: high permitting risk associated with Pebble; the “large potential investment” by First Quantum for a 50% stake; and distractions the project could cause “to the completion and ramp-up of Cobre Panama, and the potential future developments of Taca Taca and Haquira.”

First Quantum shares have traded in a 52-week range of $9.69 to $17.55 per share,  and closed at $17.06 at press time. It has 689 million shares outstanding for an $11.8-billion market capitalization.

Meanwhile, Northern Dynasty shares have moved in a 52-week range of $1.44 to $4.54 per share, and lost nearly 35¢ on the news before closing at $2.45 per share. The company has 305 million shares outstanding for a $746-million market capitalization.