Northern Dynasty Minerals: Permit Reconsideration Not Likely To End Up With A Positive Result

Summary

• The USACE is reconsidering parts of its November 2020 permit denial for Pebble.
• This is likely just to end up with additional work in justifying and backing up decision, with the final result being the same.
• The EPA Final Determination is also a barrier that prevents Pebble from getting permitted.
• Northern Dynasty may need to raise more funding later in 2023, resulting in more dilution.

Northern Dynasty Minerals (NYSE:NAK) received a modest boost after the U.S. Army Corps of Engineers (USACE) decided to reconsider parts of its November 2020 decision to deny Pebble's permit request. This came in response to an appeal by the Pebble Limited Partnership.

However, while this is better for Northern Dynasty than having the appeal denied entirely, I still believe that Pebble's chances of becoming an operational mine are very low. The Environmental Protection Agency's veto remains in place and the most likely outcome with the USACE permit is that the Alaska District Engineer addresses the parts of the appeal that were found to have merit and still denies the permit.

Meanwhile, Northern Dynasty appears to have enough cash for a couple more quarters and may thus need to raise more money during 2023. I value its stock at approximately USD$0.10 per share for a small amount of option value.

This report uses US dollars unless otherwise noted, with an exchange rate of $1.35 CAD to $1.00 USD.

USACE Permit Appeal

The Pebble Partnership appealed the USACE's decision to deny its permit request. This appeal was then sent to a USACE review officer in Oregon. The review officer decided that the majority of Pebble's appeal did not have merit, but also decided that some points did have merit.

The review officer determined that there was insufficient documentation around the communication (providing complete and detailed communication to Pebble) about the compensatory mitigation plan, leading to the belief that Pebble was not given a reasonable opportunity to address potential concerns before the final mitigation plan review. This made up a significant part of the appeal points that were considered to have merit.

The permit decision was sent back to the Alaska District Engineer "for reconsideration, additional evaluation, and documentation sufficient to support the decision".

From my reading of the appeal decision, the most likely outcome is some additional work for the Alaska District Engineer to address the appeal points that were found to have merit. Between that and the appeal points that were not found to have merit, the USACE permit is very likely to remain denied in the end. The review notes that the Alaska District Engineer's "decision made pursuant to this remand becomes the final Corps permit decision."

Aside from that, the whole process is likely to move quite slowly. Pebble initially appealed the decision in January 2021, so the appeal results took over two years to be released.

Cash Balance And Dilution

Northern Dynasty's cash balance declined by US$3.5 million in Q1 2023 from US$10.5 million to US$7.0 million. At that rate of cash burn, Northern Dynasty would have enough cash to last two quarters, until the end of Q3 2023.

I previously thought that Northern Dynasty might be able to last until 2024 before needing to raise more cash, but the effects of working capital changes have resulted in its cash balance being drawn down relatively quickly.

Northern Dynasty has approximately 530 million shares outstanding, and raising enough money to fund another year of operations would add close to 70 million shares based on its current share price. This assumes that Northern Dynasty does not receive further payments from its royalty agreement before it runs out of money.

Given the slow pace overall, there may not even be news about the final USACE permit decision within a year.

Notes On Valuation

While the permit reconsideration may be considered a modest positive for Northern Dynasty, it doesn't change my estimated value of USD$0.10 per share for the company.

From reading over the administrative appeal decision report, the most likely outcome is that Northern Dynasty/Pebble is given the opportunity to address some of the concerns about the mitigation plan, but the permit is denied again anyway in the end. Even if the USACE ends up taking a more favorable outlook towards the permit, there is still the hurdle of the EPA's Final Determination about the disposal of mining waste in Bristol Bay.

The estimated value of USD$0.10 per share just reflects a small amount of option value on Pebble, with the most likely value being $0. As well, Northern Dynasty's need to issue more shares to fund operations while it goes through all the appeals reduces its per share value as well.

Conclusion

Northern Dynasty technically received a minor boost from the USACE decision to reconsider parts of Pebble's permit application. However, the final decision on the permit remains with the Alaska District Engineer. Thus it is unlikely that the final decision will be different than the November 2020 decision to deny the permit. The USACE will just need to put in more work to justify its decision.

As well, the EPA veto remains a hurdle that would prevent Pebble from getting permitted anyway. Thus I continue to believe Northern Dynasty has quite limited value and that it will need to issue more shares soon to raise money. Northern Dynasty's value is estimated at USD$0.10 per share based on a small amount of option value.

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