Northern Dynasty (US.NAK) owns the world’s largest undeveloped gold and copper deposit, situated in Alaska’s Bristol Bay region. Since October 2016 to mid-February 2017, its share price rocketed from US$0.60 cents to a high of US$3.36, rising an incredible 660% in just 4 months.
But in the past month, after a damning report from a notorious short seller, shares have been pummelled, falling all the way down to close trade last night at US$1.23. That’s a 63% decline in less than a month!
It’s certainly been a wild ride, but here’s why we think the current fall represents an incredible second opportunity to buy into what could be the Ultimate Trump trade, and why the short seller is wrong!
Disclosure: UGC clients are long this stock.
1. Trump hates the EPA’s activist agenda
Donald Trump is not a fan of the Environmental Protection Agency (EPA). Just have a look at who he appointed as the agency’s Administrator. Scott Pruitt, a self-described “leading advocate against the EPA’s activist agenda” who sued the agency 14 times throughout his career has just taken reins of the EPA.
In addition to letting the fox loose in the hens cage, Trump also announced a proposal to slash 30% of the agency’s funding.
Why is this important? Because much of Northern Dynasty’s problems stem from the EPA’s activist agenda, whom pre-emptively vetoed NAK’s application for a mining licence.
Now we’re not against prudent environmental mining standards, but when the EPA won’t even look at US$150 million worth of economic and environmental impact studies, something is majorly wrong in a society where due process is regarded as highly important.
With a new government and a new political environment, Northern Dynasty’s chances of obtaining a licence have increase dramatically. Just a couple of weeks ago, the US House Committee on Science, Space and Technology called on the new EPA Administrator to rescind the agency’s regulatory position against the Pebble project.
2. Highly valuable mineral resource.
Northern Dynasty owns 100% of the Pebble Mine in Alaska, which is the largest undeveloped copper and gold resource in the world. It has 107 million ounces of gold (equivalent to 1.9% of all the gold ever mined), 82 billion pounds of copper, 5.6 billion pounds of molybdenum and 514 million ounces of silver in proven and inferred resources.
Source: Northern Dynasty Investor’s presentation
Assuming long-term metal prices lower than today’s (US$1,050 for gold vs US$1,200 today, and US$2.5 for copper vs US$2.65 today), the project’s pre-tax net present value ranges from US$3.8 to US$6.8 billion. This is 10.5x to 19x the current value of the entire company, whose market cap sits at just US$360 million following the recent decline.
Using prices higher than today’s (US$1,350 for gold and US$4 for copper), the pre-tax NPV jumps to a US$11.4-US$16.9 billion range. That’s a whopping 31x the lowest estimate of value based on these price projections.
In terms of mineralization and production challenges, the Pebble mine is comparable to Turquoise Hill’s (TRQ) Oyu Tolgio mine in Mongolia. However, even though Pebble has 4 times the amount of gold and 1.5 times the amount of copper, Northern Dynasty has an enterprise value of just 5% of Turquoise Hill’s.
The problem has been that, because of the EPA, Northern Dynasty hasn’t been able to get the stuff out of the ground to realise the value. But we think that is highly likely to change.
Source: Northern Dynasty Investor’s 2011 presentation
Global Ranking of contained gold:
Source: Northern Dynasty Investor’s 2011 presentation
3. EPA Issues likely to be resolved.
Since 2014, Northern Dynasty has been battling the EPA just to be able to file an application for a permit after the agency issued a veto. That is, they were not even allowed to APPLY for a licence, let alone go through the permitting process.
More recently, the EPA’s decision has been called into question, as evidence has surfaced that its decision to veto was taken in the spring of 2010, in collusion with environmental lobbyists, and well before it did any scientific assessment of the environmental impact of the project. Also, the agency decided to issue a veto before the Army Corps of Engineers made its own assessment, which usually takes precedence over the EPA’s.
The watershed study the agency eventually produced to justify the veto was heavily criticized by the EPA’s own peer-review experts.
As a result, Northern Dynasty initiated legal action and in November 2014 a federal court judge prohibited the EPA from finalizing the veto, signalling that Northern Dynasty’s case had a high chance of succeeding. On 26 October 2016, both parties announced they had entered mediation talks and as a result the stock started to rise in anticipation of a favourable outcome for NAK.
That was….. until a short seller decided to throw water on the party, which we’ll get to in a moment.
Most importantly, Northern Dynasty, and its previous partners have already spent US$750 million on the project, of which $150 million was for a major economic and environmental study, outlining NAK’s plan to develop the project in harmony with the local economy and environment.
Now you’re thinking: this should be a home run right? Unfortunately not!
A spurious short report
Over the past month, Northern Dynasty’s share price has cratered following a short-seller report released by Kerrisdale Capital. The article was issued after Kerrisdale established a huge short position in the stock, where it argued that NAK was “worthless”, because, in the past, large mining companies such as Anglo American abandoned efforts to develop the Pebble mine.
This report and the subsequent legal investigations were enough to scare the hell out of those investors who haven’t done their homework.
But there are several problems with the report that we have identified…
1 – The article fails to provide any technical or economic analysis of the project, rather their thesis is based on vague and unverifiable quotes from engineers whose identity and credentials are never revealed.
2 – Kerrisdale openly admits it has no specific resource industry expertise, and is well-known for being involved in several “short attacks” using questionable tactics. Furthermore, Kerrisdale also admits it has never even visited the site and makes no mention of their own analysis of the publicly available technical information.
3 – Many mining experts who, unlike Kerrisdale, have visited the site and studied the technical information are huge supporters of the company and big investors. Plus, do you really think mining giants like Rio Tinto, Mitsubishi and Anglo America would spending US$750 million on a deposit that was not economical? Rather, it appears clear to us the majors left the project because the EPA wouldn’t even allow them to submit an application for a mining licence and the resource sector was in the midst of a major downturn right at the time of the veto attempt. Why waste scarce resources on a project that, until now, looked unlikely to ever be approved.
So is the project economical? Well we’re not experts either, but here’s a transcript of an interview (Click here to review the interview) between Marin Katusa (MK), one of the world’s most respected resource investors, and David Lowell (DL), the geologist that discovered the enormous Escondida project and is widely regarded as one of the world’s greatest ever geologists. Both took big long positions in Northern Dynasty after having visited the site and analysed the technical data.
MK: What would you say to all of the critics and shorts out there and all of the so called geologic “experts” who are saying the project is worthless? I’ve read and heard some people state including professional geologists, claim that the project is not economically viable or there’s nothing of value at Pebble What would you say to those individuals?
DL: I would say try to get back in a mining college and learn more.
While Northern Dynasty could still fall some more from current levels and certainly fits the bill of a speculative investment, if you are patient and prepared to hold on for the wild ride, Northern Dynasty could be the ultimate TRUMP TRADE.
Disclosure : UGC clients are long NAK
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