With its stock cut in half since the start of the year and hovering near its 52-week low, Northern Dynasty Minerals (NAK -1.17%) may be drawing increased attention from investors who are keen on adding some luster to their portfolios. A mineral exploration company, Northern Dynasty is dedicated to the development of the Pebble Project, a copper-gold-molybdenum deposit -- one of the largest in the world -- located in southwestern Alaska.
Northern Dynasty certainly has the potential to be a boon for shareholders, but this is far from enough reason to open a position. Instead, investors should tread carefully with this highly speculative stock, so let's dig in and examine several of the poorer reasons for opting to pick up shares.
Image source: Getty Images.
1. Making America great again
With the election of Donald Trump, an outspoken advocate of domestic mineral production, many people believed that Northern Dynasty was now in a good position to complete the permitting phase of the Pebble Project and head farther down the path toward construction of the mine. This position seemed to be validated last summer when the company announced that the US Environmental Protection Agency was in the process of withdrawing its 2014 Clean Water Act Proposed Determination, something which would have restricted development of the mine.
Pinning one's hopes of Northern Dynasty's success in Alaska to the changing faces in Washington, however, is tenuous at best. In January, for example, EPA administrator, Scott Pruitt, cast doubt on the Pebble Project's development when he stated, "It is my judgment at this time that any mining projects in the region likely pose a risk to the abundant natural resources that exist there."
The development of the Pebble Project, which has been fraught with adversity for years, requires many more strokes of luck than the election of any one individual. In the days ahead, investors should keep this in mind. Neither the reelection of Donald Trump nor the election of another candidate who advocates for domestic mining will present Northern Dynasty with a yellow brick road to successful development of the mine.
2. Keeping things in balance
Prior to investing in any stock, it's critical that investors have a sense of the company's financial position. The bright promise of a company's potential, for example, can easily be overshadowed by a crippling debt load. In the case of Northern Dynasty, this is hardly the case, and one may be tempted to interpret the lucrative potential of the Pebble Project juxtaposed with the company's lack of debt as a compelling opportunity. The accuracy of this assessment, however, is tenuous at best. Granted, it's advantageous that the company finds itself without debt -- especially since it has no source of revenue -- but it raises the question of how the company manages to keep the lights on.
Instead of tapping the debt markets, the company is keen on raising equity to fund the development of the Pebble Project. Over the past five years, for example, shareholders have suffered dilution as the company's share count has more than tripled.
NAK Average Diluted Shares Outstanding (Annual) data by YCharts.
Shareholders, moreover, can be fairly certain that further dilution is on the horizon. Whether it comes at the hands of the agreement with First Quantum Minerals Ltd., which has the right to to acquire a 50% interest in the Pebble Project for $1.35 billion or another deal (or maybe both).
3. What's in a name?
On its website, Northern Dynasty characterizes the Pebble deposit as "one of the greatest stores of mineral wealth ever discovered, and the world's largest undeveloped copper and gold resource." With a moniker like that, it's understandable how investors may be inspired to shell out some green for the chance to prosper from the bounteous gold waiting to be dug up in Alaska. Using the company's characterization of the deposit as a rationalization for an investment, however, is more akin to an investment thesis grounded in quicksand than terra firma.
Image source: Getty Images.
Even if the company secures the necessary permits, constructs the mine, and commences mineral production, there's no guarantee that the project will maintain a cost profile which makes the Pebble Project a profitable endeavor. The questionable economics of the project, in fact, is nothing new. In a critical report on Northern Dynasty, Kerrisdale Capital cites the previous owner of the Pebble deposit, Anglo American, which estimated that "building the mine would destroy billions of dollars of value." Cutting through the illusion of the Pebble Project's value, Kerrisdale Capital -- which maintains a short position in the stock -- echoes the opinion of Anglo American, going so far as identifying Northern Dynasty as "worthless."
Investor takeaway
Since its discovery nearly 30 years ago, the Pebble deposit has inspired investors' hopes of striking it rich, but it's beleaguered history illustrates the rocky road which lies before anyone who aspires to dig its riches from the ground. Furthermore, one doesn't need to be the savviest of investors to recognize that an investment in Northern Dynasty bears an inordinate degree of risk. For some, the amount of risk may be tolerable; however, they would be best-suited to have investing theses which transcend flimsy factors like the personnel in Washington, the company's balance sheet, and the deposit's untapped mineral wealth.
