First Quantum backs out of disputed Pebble project

A framework agreement with First Quantum Minerals (TSX: FM) to help finance the controversial Pebble copper-gold project in Alaska has fallen apart — sending shares of Northern Dynasty Minerals (TSX: NDM; NYSE-AM: NAK) down more than 30%.

The two companies were “unable to reach an agreement” on the option and partnership agreement outlined in December 2017, which envisioned First Quantum earning a 50% stake in the project for US$1.5 billion, with initial staged option payments totalling US$150 million for permitting over four years.

Northern Dynasty gets to keep the US$37.5 million First Quantum has already paid to cover the first year of permitting.

Northern Dynasty declined a request from The Northern Miner for comment.

Pebble is one of the largest undeveloped copper-gold deposits in the world.

More than US$750 million has been spent on the project to date — US$573 million of which was spent by Anglo American (US: OTC: AAUK; LON: AAL) between 2007 and 2013. The rest was spent by Northern Dynasty.

Of the US$750 million, US$150 million has been directed to environmental and socio-economic studies to support project design and permitting.

The project must satisfy permitting requirements at three levels: federal, state and local, and the process “will involve some 11 regulatory agencies, 60-plus categories of permits and significant ongoing opportunities for public involvement,” Northern Dynasty states.

Workers in an undated photo taken at Northern Dynasty Minerals’ Pebble copper-gold project in Alaska. Credit: Northern Dynasty Minerals.

When the framework agreement was first announced late last year, First Quantum chairman and CEO Philip Pascall said on a conference call that the company was well aware of the project’s risks.

“We have delivered valuable growth to our stakeholders over the past 22 years,” Pascall told analysts and investors on the December call. “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.”

He also said that the project could be “developed and operated safely,” and could “coexist with important fishery resources.

“What has changed is that Northern Dynasty has come to an agreement with the U.S. Environmental Protection Agency that allows for an environmental impact statement on the project,” Pascall said.

Clive Newall, First Quantum’s president, did not respond by press time to an email requesting comment on the collapse of the framework agreement.

Joel Reynolds, western director of the U.S.-based Natural Resources Defense Council (NRDC), said that “First Quantum did the right thing.

“It’s the wrong project in the wrong place, and today’s announcement is the latest proof that it’s a bad investment — financially, environmentally and socially,” Reynolds declared in a May 25 press release. “We hope First Quantum’s decision closes the door, once and for all, on this ill-conceived and uniquely reckless scheme.

“There is no more widely condemned project anywhere in the world today, and now it’s time for Northern Dynasty to walk away,” he continued. “Bristol Bay is a national treasure whose invaluable fisheries resources must be protected and sustained forever.”

The NRDC describes Bristol Bay fishery as “the most productive wild salmon fishery in the world,” and says it supplies half the world’s sockeye salmon and makes US$1.5 billion annually.

Pebble holds 81.5 billion lb. copper and 106 million oz. gold. A preliminary economic assessment of the project filed in 2011 modelled a 200,000-tonne-per-day operation over 25-, 45- and 75-year mine lives, each with US$4.7 billion in capital expenses. Under the 75-year mining scenario, 5.9 billion tonnes of mineralized material would be extracted grading 0.5% copper, 0.31 gram gold per tonne and 0.024% moly.

Andrew Mikitchook of BMO Capital Markets in Toronto says that Northern Dynasty has six to nine months “to secure a replacement funding partner” if it wants to avoid interrupting the permitting process.

“First Quantum’s exit [after Anglo’s in 2010] does not imply the project is not partnerable or permitable,” he says in a research note. “In our opinion, First Quantum likely decided that they had other nearer-term investment and development priorities. There still remains room for a partner to benefit from historical expenditures into the project. We also acknowledge that the project opposition remains firmly entrenched (if not emboldened) post First Quantum’s departure — this will remain a serious visible risk both during and post the permitting process.”

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

While Mikitchook says he is confident that a partner for the project can be found, he has cut his target price on Northern Dynasty stock from $3.50 per share to $1.25 per share.

“First Quantum’s departure is negative in the short-term, but is likely surmountable for Pebble,” he says. “The project is actually stronger now than before the First Quantum option was announced on Dec. 18, because the permitting process was initiated in late December and remains financed through 2018, and possibly into the first part of 2019.”

Mike Kozak of Cantor Fitzgerald cut his target price on Northern Dynasty from $3 (US$2.50) per share to 50¢ (US40¢) per share, and downgraded his rating from “buy” to “hold.”

The termination of the agreement “comes as a severe and unexpected negative shock,” he says in a research note. “The fact that First Quantum is effectively ‘walking away’ from Pebble after advancing $37.5 million to Northern Dynasty is jarring.

“Presumably, First Quantum likely underestimated the level of state, local and non-governmental opposition to the Pebble project,” Kozak says. “While the project may eventually receive environmental approval at the Federal level via the U.S. Army Corps of Engineers and the National Environmental Policy Act process, local and state opposition may continue to inhibit the development of Pebble. This was likely overlooked or underestimated by First Quantum when the framework agreement was originally announced.”

Kozak notes that Northern Dynasty has $50 million in cash, which includes First Quantum’s non-refundable, initial payment of $37.5 million, and that if it continues with the permitting process, the company “would likely need to raise significant additional capital in six to 12 months, or find another large-cap partner other than First Quantum — an outcome that has now become far more unlikely.”

News of the termination sent Northern Dynasty down 32%, or 29¢, to close at 61¢ per share on May 25. The company’s shares hit a 52-week low of 57¢, declining 7%. (Northern Dynasty’s shares marked a 52-week high of $2.99 in December 2018, after the framework agreement was announced.)