There's big, and then there's Pebble Project big. That's the name of one of the world's largest undeveloped gold mines and the largest undeveloped copper mine, the prized asset of Northern Dynasty Minerals (NYSEMKT:NAK). The company has a long and volatile history with state and federal regulators, which have stymied efforts to develop Pebble to date, although its fortunes may have changed for the better in 2017.
While there's still a long way to go before the gold stock begins selling product -- Pebble may not come online until 2024 at the earliest -- many investors have overlooked that timeline to instead focus on the incredible potential on paper. Are the bullish investors right? Could Northern Dynasty Minerals be a millionaire-maker stock?
The case for Northern Dynasty Minerals
The numbers are simply staggering. According to the most optimistic combined estimates put forth by the company, Pebble could hold over 80 billion pounds of copper, 105 million ounces of gold, 5 billion pounds of molybdenum, and 515 million ounces of silver. Those resource estimates aren't likely to hold up to more detailed surveying, but they still leave plenty of room for error. It also suggests the asset will be in production for decades.
What's less obvious is that Pebble has the potential to be one of the world's lowest-cost copper mines, as explained by my Foolish colleague Reuben Gregg Brewer. If the numbers hold up, Northern Dynasty Minerals could generate some serious cash flow from its copper assets alone -- with the other precious metals being the cherry on top.
Plus, the company recently proposed a greatly reduced project area in a move that can be viewed as an olive branch to stakeholders concerned about Pebble's potential impact on Alaska's sockeye salmon fishery in Bristol Bay. That decision may help to avoid costly regulatory or legal battles and provide more confidence to shareholders in the timeline for receiving the necessary permitting approvals.
The case against Northern Dynasty Minerals
The biggest knock against Northern Dynasty Minerals isn't too imaginative, but shouldn't be dismissed for its simplicity: There's a lot that can go wrong between now and when production is expected to occur, all the way out in 2024. The company's past -- not exactly a textbook case of executing against strategic goals -- gives ample cause for doubt.
Investors should consider the following:
- Northern Dynasty Minerals is too small and too poorly capitalized to fund the costly and lengthy development of Pebble for the next seven or so years. Finding a partner (or several) with deep pockets that can help to de-risk the asset is a priority for management. In fact, at the end of June, CEO Ron Thiessen said, "I feel pretty comfortable that we can achieve a repartnering by the end of [the third quarter] of this year." But it's now two-plus months past the internally imposed deadline -- with no partner in sight. There may be a connection between the failure to agree to terms with a partner by now and the recent proposal for a smaller Pebble project.
- The lengthy timeline laid out by the company for permitting, partnering, and starting up Pebble doesn't include much wiggle room for potential regulatory, legal, or other delays. For a project of this size, that seems a little too optimistic.
- Even if Pebble is commissioned in 2024 and ramped up successfully without delays, there's no guarantee that the asset will be profitable. Despite its size, the mineral wealth is spread over a vast area of land. As a result, the concentration of gold resources is relatively low by industry standards.
The list of potential risks doesn't make me think that Northern Dynasty Minerals can obtain the market valuation necessary to become a millionaire-maker stock.
Consider that a $10,000 investment would need to see a 100x return to grow to $1 million. That means the company's valuation would need to grow from $600 million today to $60 billion without a single drop of dilution. That seems pretty unlikely.
That said, even without making investors millionaires, if management threads the needle and executes, the company has potential to deliver healthy gains to investors. However, I'll maintain my long-standing position on the stock: I feel strongly that the odds are not in the company's favor.