Northern Dynasty sinks
 on short-seller’s report

VANCOUVER  — Shares of Northern Dynasty Minerals (TSX: NDM; NYSE-MKT: NAK) have fallen 58% to $1.82 at press time after a short-seller’s report on Feb. 13 that claims the company’s Pebble copper-gold project in Alaska is “worthless.”

The stock had risen from $1 to a 52-week high of $4.54 per share since the U.S. presidential election last year, apparently on the hopes that a Donald J. Trump-led U.S. administration would loosen environmental constraints that held back the project. (For an exclusive interview with Pebble Ltd. Partnership CEO Tom Collier on Northern Dynasty’s pending litigation with the U.S. Environmental Protection Agency (EPA), please see the article “Northern Dynasty’s Pebble on ‘cusp of resolution’” [T.N.M., Feb 22–28/16]).

The New York-based short seller, Kerrisdale Capital Management, claims that Northern Dynasty withheld prefeasibility studies completed by Northern Dynasty’s former partner at Pebble, Anglo American (US-OTC: NGLOY; LON: AAL), that allegedly concluded Pebble’s net present value (NPV) was negative “to the tune of multiple billions of dollars, assuming long-term metal prices that exceed prices today.” (Download the Kerrisdale report.)

Kerrisdale said that Anglo’s decision to withdraw from the project in 2013 wasn’t due to regulatory concerns, but because building the open-pit mine would “destroy billions of dollars of value.”

As stated in the Kerrisdale report: “according to our sources, Northern Dynasty knew about the negative results of Anglo’s analysis but cut it short to avoid having to disclose it to the public — pursuing what one engineer described to us as ‘a hidden agenda of telling a good story.’ In the past decade, Northern Dynasty has hired at least two major engineering firms to prepare preliminary feasibility studies of Pebble laying out its economics in detail, yet it has failed to publish the findings — because they were damning.”

Sources allegedly told the investment research firm that between US$11 billion and US$13 billion is needed to build the mine, which is more than double the US$4.7-billion figure reported in Northern Dynasty’s 2011 preliminary economic assessment (PEA), which envisaged a 200,000-tonne-per-day open-pit operation.

Northern Dynasty issued a rebuttal on Feb. 17, stating that Kerrisdale would realize “significant gains” if Northern Dynasty’s stock price declines, and is “a troubled organization, which has recently been in the news for major client and staff defections, and alleged senior staff personal misconduct.” 

Northern Dynasty says that Kerrisdale offers no technical or scientific evidence to back its claims, and leans on “anonymous hearsay” from individuals who may “likewise hold or have held short positions in Northern Dynasty.”

In support of Northern Dynasty, analysts from TD Securities said Kerrisdale’s capital estimates are “misleading,” given that no context was given as to the project’s size and scale. The bank maintains its $5 target price on the stock and upgraded its rating to a “speculative buy” from a “hold.”

The Northern Miner spoke with Northern Dynasty’s president and CEO Ronald Thiessen about Kerrisdale’s allegations.

The Northern Miner: What was your reaction to the Kerrisdale report?

Ronald Thiessen: It was kind of frustrating, because we’re held to a reporting standard that’s very rigorous and their claims against our project weren’t warranted — they have zero expertise. Everything we do has to be independently reviewed, and a plethora of engineers have signed off and certified our work. So to have a self-interested short seller publish an anonymous statement from a former Anglo engineer that claimed the project isn’t economic is one of the many things that is quite troubling about all this.   

I know most of the Anglo engineers on this project … and I don’t know whether this engineer is being paid. Kerrisdale mentions in their disclaimer that the author and others stand to profit if Kerrisdale does. That’s a contingency fee, and you can’t use your professional designation to certify something on a contingency fee.

There are other ways for someone to profit from this. A short is simply a buy ticket that gets exercised in the future. So while Kerrisdale hammers the stock down with short selling, they have to buy back that position back at some point — unless we go bankrupt, which is clearly not going to happen.

They also claimed we have a weak balance sheet, but the last time I checked we have US$54 million in the bank, so that’s at least a month out of date or more.

(Northern Dynasty closed a US$37.4-million bought deal offering on Jan. 26, in which 20.4 million shares were sold at US$1.85 per share.)

The options market saw quite a bit of activity leading up to this report. So my guess is, that’s where some of the economic opportunity arises, because it’s virtually a no-risk situation. It’s not a huge amount of money, but it’s millions.

TNM: Is there a report that claims Pebble would require up to US$13 billion in capital expenses?

RT: The only study that’s been issued and approved is the 2011 PEA that we put out. Within the Pebble Ltd. Partnership (PLP), there are literally hundreds of iterations of various studies. One of them, which was completed by various Anglo engineers within the PLP, came out with a big number but they were quick to say that it was an unreviewed, first-pass report. They expected the number to be much lower. Further review of the report identified flaws and there was another US$4 billion in savings. We had other engineers look at it and they said it’d be even lower. So that first iteration was disregarded and never finalized.

To my knowledge, Anglo has never done a prefeasibility study, but given their size and scale if they did, they wouldn’t have to release it.

(The PEA, which was completed by Tetra Tech’s Wardrop Engineering, outlined a 200,000-tonne-per-day open-pit operation with an initial 25-year mine life, potentially extending to 78 years. Capital expenses for the operation stand at US$4.7 billion, whereas operating costs, real and undiscounted, are US$1.52 per short ton.

Assuming a 45-year mine life, the operation would process 3.4 billion tonnes of ore, with a strip ratio of 2.1 to 1 and average grades of 0.5% copper, 0.38 gram gold per tonne and 214 ppm molybdenum. Metallurgical recoveries average 87.9% for copper, 71.3% for gold and 87.9% for molybdenum.

Mining would produce 30.5 billion lb. copper, 30.3 million oz. gold and 1.4 billion lb. molybdenum, as well as 140 million oz. silver, 1.2 million kilogram rhenium and 907,000 oz. palladium.

The project’s pre-tax NPV — at a 7% discount rate — is US$6.1 billion, the pre-tax internal rate of return (IRR) is 14.2% and the payback period is 6.2 years, assuming long-term metal prices of US$2.50 per lb. copper, US$1,050 per oz. gold, US$13.50 per lb. molybdenum and US$15 per oz. silver.

Northern Dynasty’s 50% interest in the project would yield a 15.4% post-tax IRR, a 5.3-year payback and US$2.4-billion NPV, at a 7% discount rate, at long-term metal prices.)

TNM: Why did Anglo American drop the project in 2013?

RT: I don’t want to put words in their mouth, but it wasn’t the environmental opposition and it wasn’t because they felt the project was uneconomic. It was a difficult time. Mark Cutifani came on as CEO and the company’s balance sheet was under distress. They were deep into its Minas-Rio iron ore project in Brazil, and the Anglo American Platinum situation was pretty much a nightmare in South Africa. They had several advanced projects that they wanted to put on care and maintenance, and we were one of them, despite them publicly referring to Pebble as a deposit of rare magnitude and quality.

Being a single-asset company, we couldn’t agree with placing it on care and maintenance. We were ready to go into permitting that year, so they decided to withdraw and left with no interest.

TNM: Are there any partnerships on the table for Pebble?

RT: There was interest in the project from the day Anglo announced their decision to pull out. We would’ve replaced Anglo within six months if it wasn’t for the EPA initiating the pre-emptive veto process on Feb. 28, 2014. If we can clear the decks and take their howitzer out of the room, then this is a fabulous project for anyone to get involved in. It’s got size, scale, optionality — and all the heavy lifting is done. We estimate it will cost US$150 million to go through permitting over the next three to four years.

TNM: What’s the status on the EPA litigation?

RT: We were pretty close to an agreement last year and settled some terms, but we didn’t get everything resolved. Then the U.S. election occurred and that overwhelmed the mediation process. We continued to talk with a view that maybe we could come to a settlement with the Obama administration, but that didn’t happen. So on Dec. 30, 2016, the Department of Justice entered into a stay on proceedings, which is in place until March 20. We’re pretty confident that we can resolve the litigation with the EPA by the end of March. [President Trump’s nominee Scott Pruitt was confirmed as the EPA’s new administrator on Feb. 17.]

TNM: What are your thoughts on Scott Pruitt?

RT: In 2012, he was in Alaska as part of the National Association of Attorneys General summit, and we were given the opportunity to brief him on Pebble, and told him how we felt the EPA was overstepping their statutory authority. The litigation he’s involved in with the EPA is on the same grounds, so if there’s anyone who can understand our position the most, it’s him.

Myron Ebell, who led Trump’s transition team for the EPA, also stood on the ground in 2011, and wrote a half-dozen articles on Pebble, and how it was the poster child of the EPA’s overreach.

Our objective with this court case all along was to bring the EPA to a table to negotiate a resolution that allows us to proceed with a normal permitting process under the U.S. Army Corps of Engineers, where the fundamental document on which anybody can make a decision whether the project will move forward or not would be an environmental impact statement. This preemptive veto the EPA was driving forward was drafted on a mine development concept that was not of our making, which was outlined in their Bristol Bay Watershed Assessment report.

We feel we’re about to resolve the litigation and that will remove the EPA’s pre-emptive veto. We’re not looking for any special treatment, we’re just looking for normal.

TNM: What makes the Pebble project attractive to investors?

RT: This project is extremely unique. Where else do you find a resource like this, with US$750 million already spent on it, and ready to go into permitting today? You can’t find anything else in the world quite like it. Obviously the project has some risk on the permitting side, and we believe we’ve done a tremendous amount of work to reduce that risk. We’ve spent US$150 million on our environmental baseline document and we know the region around the deposit extremely well. It’s not at high-altitude, it has flat terrane, there’s water available and it’s just 135 km to the coast. There are several of these deposits operating in B.C., such as Gibraltar, Highland Valley Copper, Red Chris and Mount Milligan.