Don't Get Greedy With Northern Dynasty Minerals, Ltd. Stock
After breaking onto the gold stock scene in 2016 and leaving behind its penny-stock Northern Dynasty Minerals (NYSEMKT: NAK) endured a volatile 2017. It's easy to see why investors are torn with the stock.
On one hand, the company's prized asset, the Pebble Project in Alaska, is the largest known undeveloped gold and copper mine in the world. If successfully developed, it has the potential to make Northern Dynasty Minerals into a top precious-metals miner for years to come. On the other hand, the mine isn't expected to start producing until 2024 at the earliest. Besides, the tiny company is in no position to develop the asset alone -- and investors may not like the terms required to bring in a serious partner.
While management has accomplished several tasks on its to-do list in the past 18 months, there's still an unhealthy amount of uncertainty facing investors. That's why it's best not to get greedy with Northern Dynasty Minerals stock in 2018.
Image source: Getty Images.
Plenty of potential -- and uncertainty
In the past year or so, the most important updates handed down to investors from management have largely concerned permitting processes and the status of applications. In other words, paperwork. While that may sound boring for a gold mining stock, it's still an important part of the work needed to eventually thrust Pebble into production.
Northern Dynasty Minerals has successfully reset conversations with state and federal regulators and local residents that would be affected by the mine's operations. Those are still unfolding or, in some cases, have yet to be formally initiated, but it's a heck of a lot better from the situation a couple of short years ago, when it looked unlikely that Pebble would ever be more than a vast parcel of undeveloped Alaskan wilderness.
Each update brings the company closer to realizing its potential. And judging from resource estimates, that potential is enormous, especially in copper.
Metal | Measured and Indicated Resources | Inferred Resources |
|---|---|---|
Copper | 57 billion pounds | 25 billion pounds |
Gold | 70 million ounces | 37 million ounces |
Molybdenum | 3.4 billion pounds | 2.2 billion pounds |
Silver | 344 million ounces | 170 million ounces |
Data source: Northern Dynasty Minerals.
Then again, discussing resource estimates is the perfect way to make the obvious point: There's a big gap between potential and performance.
Resource estimates aren't the same as reserves, which are accompanied by a higher level of confidence after engineers put a mining asset through more scrutiny. Pebble isn't there quite yet -- and in many ways that mirrors the state of Northern Dynasty Minerals.
In recent months, investors were reminded of the volatility likely to happen between now and production. Management announced a framework agreement with First Quantum Minerals in December, but Wall Street wasn't impressed. While the preliminary courtship provided the tiny miner with $37.5 million upfront, the path forward is less certain.
Northern Dynasty Minerals could receive up to $1.5 billion total, including $150 million within the next four years, but that's not guaranteed. It would also have to give up a 50% equity stake in the Pebble Project, which some analysts think is worth more than $1.5 billion. Given a lack of financial resources and that the only true bargaining chip is the asset itself, investors shouldn't be too surprised.
That said, there's plenty more uncertainty ahead that investors need to take into account. Here's a list of outstanding tasks that Northern Dynasty Minerals must complete between 2018 and 2025:
Goal | Time Frame |
|---|---|
Engineering studies | 2004 to 2019 |
Environmental and socioeconomic studies | 2004 to 2022 |
First Quantum Minerals option execution | 2017 to 2018 |
Permitting | 2017 to 2021 |
Feasibility | 2019 to 2021 |
Project financing | 2019 to 2021 |
Design engineering | 2020 to 2023 |
Construction | 2021 to 2025 |
Production (ramp-up) | 2024 to 2025 |
Data source: Northern Dynasty Minerals.
Many of these tasks are dependent on the successful and timely completion of preceding tasks. That means even the slightest delay in permitting, for example, would delay the start date for project financing, and so on.
While the timeline is reasonable and Northern Dynasty Minerals could complete each goal in the specified time, there are many factors outside of the company's control. Regulatory agencies could drag their feet during the permitting process, or First Quantum Minerals could still walk.
Case in point: The company already missed its self-imposed deadline to find a partner by the end of September 2017 (and having only a framework agreement in place means this task is still technically incomplete) and downsized the footprint of planned operations at Pebble. Therefore, it's reasonable to expect the path between now and production will deviate from current plans.
Investor takeaway
The Pebble Project is the world's largest undeveloped known copper and gold resource. That looks great on paper, and that alone is enough to draw the attention of investors. However, there's a lot of time between now and the estimated start of production in 2024. Given all the hurdles left to jump through spanning regulatory, engineering, and financial, it's best not to get greedy with Northern Dynasty Minerals stock at the present time.
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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
