Shares of Northern Dynasty Minerals (NAK -4.47%), a mineral exploration and development company dedicated to the development of the Pebble Project in Alaska, fell 15% in 2017, according to data from S&P Global Market Intelligence.
Characterized on Northern Dynasty's website as "indisputably one of the world's largest undeveloped copper/gold deposits with a potential mine life that is measured in decades," the Pebble Project is brimming with potential. Nearly 30 years after its discovery, however, the site has still failed to achieve commercial gold production.
Beginning the new year with a bang, shares of Northern Dynasty rose 50% through early February, presumably fueled by speculation that the company would be able to expedite development of its Pebble Project under the newly elected President Trump. But the party was short-lived.
On Feb. 14, a critical report and letter from Kerrisdale Capital surfaced that urged investors to sell the stock and announced its short position in the stock. Trading as much as 36% lower during the day on which the report came out, shares pared back the loss and ended the day down only 20%.
Among a variety of criticisms, Kerrisdale Capital cited in an article published on an investing website that said AngloGold Ashanti ended a partnership in 2013 with Northern Dynasty -- after funding $573 million -- because it decided that "building the mine would destroy billions of dollars of value." Kerrisdale summed up its opinion in four words: "Northern Dynasty is worthless."
Another source of disappointment for investors came in the form of a late-December announcement that the company had entered into a framework agreement with First Quantum Minerals Ltd. After providing $150 million to Northern Dynasty over four years in the form of option payments, First Quantum will have the right to acquire a 50% interest in the Pebble Project for $1.35 billion. Although this may seem like good news, investors weren't happy. Since the company doesn't generate revenue, it relies on raising equity to keep the lights on.
Consequently, shareholders have suffered from significant dilution over the past three years. This may have been interpreted as a necessary evil as Northern Dynasty strives to bring the Pebble Project to fruition. But the partnership with First Quantum, which could potentially dilute shareholder value considerably more, was apparently too much to take.
Northern Dynasty disappointed investors in 2017, and I won't be surprised if 2018 brings more of the same. There may be minor victories here and there, but the ultimate vindication for the company will come in the form of developing the Pebble Project into a successful mining operation -- something that remains highly uncertain. I'll happily watch this story unfurl from the sidelines, and unless investors have an extremely high tolerance for risk, that should be their approach as well.