Northern Dynasty Minerals: World Class Copper, Gold Project

Northern Dynasty Minerals’ (NAK) Pebble project (50% owned) in south-west Alaska is the largest undeveloped copper and gold property globally. Due to high by-product credits, Pebble is projected to have a negative cash cost for copper. The preliminary assessment was released in February 2011 and the company projects Pebble will receive its environmental permits in late-2017 and commence production in late-2021. We believe the key to Pebble’s success is securing environmental permits. Pebble is one of the most exciting mining projects globally in terms of scale, with an internal rate of return to NDM equity investors, at the current share price, of 15.9% based on the 45 year case. Assuming the project is executed to plan, our valuation for Northern Dynasty is US$5.78/share based on a dividend discount model. It also represents a cheap way of buying resources at a multiple of just 0.6c per pound of in-situ copper.

Sensitivities: Permitting and execution key
Exploration and development-stage mining companies have permitting, geologic, execution, capital-raising and commodity price risks. Due to its size, scale and location, there is some opposition to permitting the Pebble project, but there is also meaningful local support due to the potentially favourable economic impact of the project. There is a risk the geology is more challenging than the engineering studies predict, and there is the possibility management may have difficulty raising capital.

Financing
The preliminary assessment (PA) estimates Pebble capex at US$6bn and we estimate it will require US$300m for permitting. We assume third parties provide US$1.3bn for infrastructure and the Partners sign a US$1.4bn gold-streaming agreement. We assume it raises the remaining US$3.3bn 60-40 debt equity, leaving US$620m in equity to be split equally between the partners after Anglo applies its remaining US$700m in earn-in capital to the equity requirement.

Valuation: C$5.78 per share
In calculating a dividend discount valuation, we use a 10% discount rate, a 45-year mine life and long-term price assumptions of US$2.96/lb for copper, US$1,676/oz for gold and US$12/lb for molybdenum. We assume the financial steps as outlined above, on which basis the dividend discount model values Northern Dynasty at US$5.78/share. Alternatively, were it to be valued at the average global rating of in-situ copper resources, the value of its 50% interest in Pebble would be US$1.32bn or US$12.91 per share (based on a 0.3% copper equivalent cut-off grade).

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