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Why Northern Dynasty Limited Stock Fell 12% at the Open on July 10

By Reuben Gregg Brewer – Updated Jul 10, 2020 at 10:53AM

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After a very good run, the stock plummeted when the would-be miner tried to take advantage of the gains.

What happened

Shares of Northern Dynasty Limited (NAK 1.11%) fell sharply at the open of trading on July 10, losing just over 12% of their value. That, however, has to be juxtaposed against the stock's roughly 200% gain over the past three months (which includes today's early losses). The company's efforts to complete the Pebble Project have been a key factor in both the longer-term rise and the swift decline today.

So what

Northern Dynasty Limited's main asset is the Pebble Project, which it hopes to develop into a major gold and copper mine. There has been stiff opposition to the project from day one, but 2020 has seen some good news developments. That includes key regulatory approvals, or at least hints that approvals will be forthcoming, and agreements with nearby communities that suggest local opposition will be less material than once feared. The stock price increase of late has been nothing short of incredible, noting that there remains a huge amount of work to be done before Pebble produces any gold or copper -- it is still in the approval stage of development, after all.

A pile of gold nuggets with a mining pick on top.

Image source: Getty Images.

Which brings us to today's news. Northern Dynasty Limited has agreed to sell 21 million shares of stock (a larger number than previously expected) at $1.43 per share in a prearranged deal. The sale will bring in roughly $30 million. The underwriter has the right to sell another 3.15 million shares as well, which would add another $4.5 million or so to the tally. Three months ago, the stock was selling at around $0.50 a share, so this is a really good time for Northern Dynasty to raise the capital it needs to further the Pebble Project's development efforts.

However, the $1.43 per share price is notably below what the stock has been trading hands at recently. Just a day or so ago, the shares were fetching around $1.75 apiece. But you can't blame management for selling as many shares as possible while demand is high, even if it ends up diluting current shareholders.

In the end, it's not uncommon for a discount to be offered in deals like this, though this is a pretty big discount. That said, it's also not unusual for investors to react by pushing the stock price lower, either.

Now what

Northern Dynasty Limited is still in the early stages of building a mine at the Pebble Project. Assuming it gets all of the approvals it needs, it still faces huge construction costs and the often lengthy mine construction process. This is unlikely to be the last time it taps the capital markets to raise money. This is not a great option for risk-averse investors looking to diversify their portfolios with gold; other precious metals miners would be better suited to that. Northern Dynasty Limited is really a speculative investment in a potential mine, which today's news points out is far from complete.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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