Shares of Northern Dynasty Minerals (NYSEMKT:NAK), a developmental-stage precious-metals mining company that owns the Pebble Project in Alaska, surged as much as 33% during Tuesday's trading session. There appear to be two reasons behind the huge move to the upside.
For starters, precious metals such as gold and silver are having their best day in more than a month. At one point during the trading day, gold was up over 1% and silver was higher by nearly 2%. Considering that gold has fallen by more than $200 per ounce since election night, a "relief rally" in precious metals was probably called for. Mining companies such as Northern Dynasty Minerals benefit when precious-metal prices rise, because it can lead to higher margins.
Speculation is probably the other factor playing a role here. Northern Dynasty Minerals is a developmental-stage small-cap stock that's up nearly 700% year to date, and almost 300% since October. This latest surge is probably a result of short-term traders or day traders who are gambling with their money and hoping for a quick buck based on its recent momentum. However, there's a small chance it could be some semblance of end-of-year window dressing. Hedge fund managers like to show prospective investors that they've "held" the market's top performers during the year, so it's possible we could be witnessing some sparse hedge fund buying.
Regardless of the reason for this latest move higher in Northern Dynasty Minerals, your best bet is going to be keep far, far away.
What investors really need to understand here is that Northern Dynasty is a long way from commercial production. In fact, it's still in the process of determining if it's even economically feasible to mine the Pebble Project, which makes up the bulk of its $400 million-plus valuation. As noted in the company's third-quarter earnings report, "The Group's continuing operations and the underlying value and recoverability of the amounts shown for the Group's mineral property interests, is entirely dependent upon the existence of economically recoverable mineral reserves." In other words, there's no guarantee Northern Dynasty Minerals even has an economically viable mine, yet it sports an inflated valuation.
Making matters worse, even if the company finds a path to develop Pebble, it has nowhere near the capital needed to develop the mine. It's a stretch to say that a lender would go out on a limb with Northern Dynasty dependent on a single asset, meaning monetizing Pebble could be problematic.
My suggestion would be to keep your distance from Northern Dynasty Minerals and not be tempted by this end-of-year surge.
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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