We are short shares of Northern Dynasty Minerals, a Canadian company that owns an undeveloped copper and gold resource in Alaska called the Pebble deposit. Discovered decades ago but never mined, the Pebble deposit has inspired intense controversy, as a broad and bipartisan coalition including environmentalists, Alaska Natives, and commercial fishermen fought its planned development, leading the Environmental Protection Agency in 2014 to stop the project in its tracks. The election of Donald Trump, however, has fueled hopes that a more mining-friendly EPA will allow the project to move forward. Since Election Day, Northern Dynasty’s stock price has increased 326% amid a host of promotional campaigns. As one observer put it on January 20th, “This is getting a little ridiculous. I don’t think I’ve ever seen a single mining stock as aggressively endorsed by investment newsletters as Northern Dynasty has been over the past few months.”

All this enthusiasm is misplaced. We believe Northern Dynasty is worthless. Though the legal and regulatory problems that will continue to plague the Pebble project even under a Trump presidency are enormous, the project’s Achilles’ heel is more fundamental: economics. Large players in the mining industry, including Teck, Mitsubishi, Rio Tinto, and Anglo American, invested in Pebble years ago; one by one, they all abandoned it. Northern Dynasty itself was reportedly “on an aggressive sales push” to rid itself of the asset back in 2011. Why?

Based on our discussions with multiple people directly involved in planning the Pebble project, we believe the answer is simple: the upfront capital costs necessary to build and operate the mine are so onerous that the mine isn’t commercially viable. Indeed, Anglo American – Northern Dynasty’s former partner on the Pebble project, before it exited in 2013 – concluded that, under a range of scenarios and despite years of attempted optimization, building the mine would destroy billions of dollars of value. (Moreover, Anglo drew this conclusion based on assumed selling prices for key metals that are significantly higher than such prices today.) According to our sources, Northern Dynasty knew about the negative results of Anglo’s analysis but cut it short to avoid having to disclose it to the public – pursuing what one engineer described to us as “a hidden agenda of telling a good story.” In the past decade, Northern Dynasty has hired at least two major engineering firms to prepare preliminary feasibility studies of Pebble laying out its economics in detail, yet it has failed to publish their findings – because they were damning.

Even if the Pebble project were commercially viable, it would still face daunting odds. A majority of Alaskans – Republicans, Democrats, and independents – oppose the project and recently voted 2-to-1 to give the state legislature an effective veto over its construction even if it ultimately receives federal and state permits. Moreover, the EPA has the power to shut down the mine at any time, even after permitting – a likely outcome under any future Democratic administration. With no economic value and huge political risks, Northern Dynasty is a zero.

I. Investment Highlights

The Pebble deposit is not commercially viable. Though very large, the Pebble deposit is relatively low-grade, meaning that large amounts of raw material would need to be processed to extract small amounts of valuable substances like copper, gold, and molybdenum. But this processing requires a great deal of infrastructure, and the pristine Bristol Bay region where Pebble is located has almost none. Mining Pebble would thus entail building a large power plant, a deep-water harbor, an 86-mile-long road, an equally long set of pipelines for moving copper concentrate, multiple dams that would rank among the largest on the planet, potentially a floating liquefied natural gas platform, and more – all in a harsh natural environment subject to extremes of temperature and precipitation, not to mention earthquakes. Though, in the words of one person familiar with Pebble, Northern Dynasty consistently “tried to underplay the issues,” in reality the project was, in the words of another, “pushing the boundaries of engineering. Actually it’s quite an interesting project due to all the challenges…but from an investment perspective it’s obviously risky.”

Sure enough, in 2013 Anglo American, Northern Dynasty’s former partner, withdrew from the project, walking away from more than $500 million in sunk costs and making no effort to renegotiate the terms of its deal instead of simply exiting. Though some Northern Dynasty bulls now assume Anglo’s decision stemmed entirely from regulatory concerns that will now abate, Northern Dynasty itself explicitly denied that the EPA had anything to do with it. Our discussions with people directly involved in the project confirmed that, as one crisply put it, “Anglo exited because of economics.”

Anglo personnel viewed Northern Dynasty’s economic analyses as unrealistic and overly optimistic, even speculating that concern for the company’s stock price was pushing Northern Dynasty management to make short-sighted choices. In Anglo’s more sober view, Pebble’s upfront capital costs would be more than 100% higher than what Northern Dynasty has suggested, while operating costs would be roughly 20% higher. These differences amounted to many billions of dollars, which – for a project that Northern Dynasty’s own 2011 preliminary assessment accorded an after-tax NPV of only $4 billion1 – easily drove the value of the project into negative territory, even before adjusting for its unusual regulatory and reputational risks. We believe Northern Dynasty knew about Anglo’s analysis but suppressed it. As one source told us (and a second source confirmed):

What’s interesting is, as we were about to issue our PFS [pre-feasibility study] that we came up [with] in 2012 or so, they [Northern Dynasty] stopped us finishing that PFS. We weren’t supposed to issue the report, you see. We were coming up with 13 billion in capital.

By contrast, Northern Dynasty’s preliminary assessment indicated that Pebble’s initial capital cost would be only $4.7 billion.

In short, one of the world’s largest and most experienced mine operators concluded after years of study that the Pebble project was so unlikely to earn its cost of capital that it wasn’t worth trying; one former Anglo executive ruefully complained, with hindsight, that “he would never have touched Pebble at all.” Indeed, every large mining player that has ever become involved with Pebble has either abandoned it or attempted to – including Northern Dynasty. President Trump’s EPA may be easier on the mining industry than President Obama’s, but it can’t make a success out of a value-destroying boondoggle.

The Pebble project continues to face immense political risks. To be sure, the specific step that the EPA took in 2014 to halt Pebble’s development – a preemptive “veto” under Section 404(c) of the Clean Water Act, which authorizes the agency to block specified areas from serving as waste disposal sites in order to prevent “an unacceptable adverse effect on…water supplies…and fishery areas” – was unusual and aggressive. Trump’s as yet unconfirmed nominee for EPA administrator, Scott Pruitt, has criticized (and sued) the agency for overreaching. He may indeed entertain the notion of dropping the veto and allowing Northern Dynasty to apply for the many necessary federal, state, and local mine-construction permits in the ordinary fashion.

However, even if Northern Dynasty does manage to apply for permits – something it’s claimed it was on the verge of doing for more

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