Canadian company Northern Dynasty Minerals owns the Pebble Project, an undeveloped copper and gold deposit in Alaska’s Bristol Bay Basin. Northern Dynasty has contended for years that the area holds significant deposits of the world’s copper, gold, molybdenum and silver. To date, the company has spent over 10 years and invested $750 million in environmental and socio economic studies, engineering design and accommodating environmental concerns.
The project has faced a host of opposition from across the spectrum, including Alaska Natives, commercial fishermen, environmentalists, state and local authorities and a
majority of state voters. In response to these concerns, the Environmental Protection Agency (EPA) stopped the project in 2014. With the election of Donald Trump, however, several investors anticipate a reversal of that decision with a new administration in place. Since the election, Northern Dynasty’s stock price soared 326% to a high of $3.45 per share in February. Within two weeks of that high, the price dropped, and it’s been consistently trading below $2.00 per share.
Investor optimism for the new EPA administration has not been misplaced. In May 2017, the EPA settled litigation with Northern Dynasty which included a potential revision of the previous administration’s Clean Water Act (CWA) determination, theoretically paving the way for permits.
Kerrisdale CIO Sahm Adrangi published his findings about Northern Dynasty in February 2017. At the time, while acknowledging the potential EPA reversal, Adrangi stated that regardless of the permitting process, the Pebble Project essentially is worthless. He made a strong case, one that remains substantial despite recent events.
The Pebble Project has had a troubled history. From as far back as 2006, major mining industry players such as Teck, Mitsubishi, Rio Tinto and Anglo American all have invested significant cash with Northern Dynasty, only to walk away time and again. Northern Dynasty itself tried to sell its ownership share in 2011.
While the company touts potential profits and has high confidence that the permitting process will proceed, Adrangi points to a much more basic issue for investors: financials. According to an unpublished analysis in 2013 by former Northern Dynasty partner Anglo American, the critical factors for success weren’t in the numbers, and that was when the key metal prices were higher than they are today. In fact, after investing over $500 million, Anglo American literally walked away. Prior to that, former partner Rio Tinto also left without a penny, donating all its shares to two Alaska charities. Perhaps most damning, Northern Dynasty has failed to publish Anglo American’s findings, nor feasibility studies from at least two other major engineering firms in the last ten years.
Northern Dynasty’s Numbers Don’t Add Up for Kerrisdale
According to Sahm Adrangi, the Pebble Project faces a laundry list of engineering and capital expenditure issues that represent significant hurdles. Due to the quality of the deposit, valuable metals will need to be extracted from comparatively huge amounts of raw material. The process will require an enormous amount of infrastructure investment, including a power plant, pipelines for moving concentrate, dams that will push the boundaries of engineering and the possibility of the need for a floating liquefied natural gas platform. Even the geography is stacked against the economics. A deep water harbor is necessary with access via an 86-mile long road–which does not exist. Extreme weather conditions and an earthquake zone are almost an afterthought.
The political situation does not help matters. While investors expressed enthusiasm due to the last election, the fact remains that subsequent administrations can grant or withdraw permits at the mercy of political winds. Indeed, the Obama administration issued an injunction preventing the project from going forward, now potentially reversible. This scenario can play out again and again in the future.
Which brings Sahm Adrangi’s concerns to the next level of government regulation. The Pebble Project is overwhelmingly opposed by local and state officials as well as voters. In 2014, 60% of voters voted to enable the state legislators to have approval authority over any sulfide mining in the Bristol Bay watershed, regardless of permitting. With prominent state officials and a coalition of opposition across the political spectrum, the new authority of the legislature is likely to be the death knell for the project, regardless of what happens in Washington, DC.
Even the apparent favorable turn by the EPA has not done much to improve the Pebble Project’s prospects. On news of the settlement in May 2017, and the EPA’s willingness to solicit public comment in October 2017 on whether to withdraw from its previous finding, stock prices did not see significant gains like it did with initial election enthusiasm and have, once again, declined. In light of its findings, Kerrisdale Capital has gone short on Northern Dynasty Minerals.
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