Mining stocks typically offer a 3-to-1 leverage to gold's spot price making them both attractive and risky investments. A recent trend in the sector, as gold prices continued their bull run, is consolidation. Large-cap miners avoid developing assets in favor of buying out or partnering with a junior that has potentially lucrative projects but minimal financing.
Junior miners typically have a market cap of under $1.5 billion. They also are primarily in the exploration or developmental stage of production. It can sometimes take up to 10 years for a miner to actually bring metal out of the ground. Meanwhile, the junior must battle financing issues, geopolitical risks and permitting problems. As above ground gold supply tightens and investment demand grows, many analysts expect prices to keep rising, a potential catalyst for junior mining stocks.
Northern Dynasty (NAK) is a mineral exploration company with a market cap of $815.66 million. Shares currently trade at $8.77, but the stock has four "buy" ratings and an average price target of $20. I recently spoke with the CEO, Ron Thiessen, to get a candid look at the company, its potential upside and exit strategy.Give me a snapshot of Northern Dynasty. Thiessen: Northern Dynasty is a 50% partner with Anglo American on what is probably the world's largest mineral deposit located in Southwestern Alaska. It's predominately a copper deposit but it is fully metallic -- has copper, gold, molybdenum, uranium, silver, and palladium. And it's probably one of the most important mineral deposits ... in North America. How do you mitigate risk? Thiessen: Well, first of all risk comes in various forms. So you've got geological risk [which we mitigate] by doing a tremendous amount of drilling. I think we've got something like 700 core holes in this property and many, many miles of drilling. ... Then there's engineering risk. And we've got our own engineering team which consists of about 16 people plus we're engaged with about a dozen of the world's largest engineering companies on everything from infrastructure ... [and] power to the typical process of engineering ... and then you've got environmental risk. So we've spent probably something [like] $120 million on environmental base line and socio-economic studies. Those are the main risks that you face [when] taking a project up to permitting and feasibility ... Northern Dynasty has spent about $180 million and Anglo American spent about $220 million ... to date. And we're still working on that feasibility and getting to that permitting stand point. So when do you expect to have all your permitting in gear and when would you start producing? Thiessen: We would anticipate that permitting start in 2011 ... It's a two-year program for a project like Pebble. We're engaged in what's called a 'large mine permitting fee' at the Department of Natural Resources in Alaska ... We have hired, as our part of our permitting team, people who have permitted large mines previously in Alaska so they're fairly comfortable with the process and how to go about it. You previously said that 2016 is when you will start producing. Are you still on track? Thiessen: When we go into production is purely a function of when the permit is issued. One of the things I like to say is that I'm not going to pre-empt the state regulators on telling them when we're going to have a permit. Yes, if everything went according [to plan] we'd probably get a permit in two years and construction and development would take two to three years so hopefully we can be in production by 2016. But those are just estimates. ... that [estimate] will probably have to be changed as we firm up actual permitting dates and that will come through from the Pebble management team a little later this year. Now of course one of the biggest problems for small-cap miners is funding, so six years plus is a significant amount of time. How are you doing for money? Thiessen: Well, fortunately the way the deal is structured is that Northern Dynasty brought the asset and Anglo brings the money. So Anglo, in order to complete their side of the transaction, must provide $1.5 billion in funding. And that's on an as-needed basis. Up until the end of 2009, Anglo had spent about $220-$225 million .... So they've got quite a bit of funding left to go ... So actually Northern Dynasty itself doesn't have to raise any money. What happens if Anglo runs out of cash. Would it ever turn to you guys? Thiessen: If Anglo American runs out of cash ... then they're out of the project ... We, ourselves, have $40 million in the treasury and a lot of people who would love to be in Anglo's position. What does this partnership do to your ability to profit once you go on stream? Is it a 50/50 profit share? Thiessen: Yes it is ... we get 50/50 ... I like to tell people we actually brought more than they did. We brought an asset that has 10.8 billion tons of resources ... 100 million ounces of gold [and] 90 billion pounds of copper. The value of that asset is well in excess of the $1.5 billion they have to put up to retain their 50% interest ... I've not received any indications whatsoever that Anglo is interested in walking away from the project or even slowing the project down. Do you have an exit strategy? Thiessen: We like to take assets to a point where we believe we've delivered the highest value that we think we can get to and at that point we need to decide whether we develop the asset, joint venture the asset or sell it. Now we took the Pebble project to a certain level we brought Rio Tinto (RTP) in to give us credibility ... We then brought Anglo American in to basically fund the balance of the engineering, feasibility and permitting and a large part of the development capital. And ... then Mitsubishi Corporation came in as a large shareholder to add further credibility to its project. We've got three of the world's leading metal companies that are involved in the project and we're probably at the point where we've delivered as much value as we can. We know that there are a lot of companies that would be interested in owning a big piece of the Pebble project whether that is 50% of the project or 25%. Probably the easiest and best way to get to that position is with the acquisition of Northern Dynasty. I do believe that at the end of the day there will be a minimum of two and maybe as many as four companies who develop the project. It's unlikely that Northern Dynasty is one of those. Northern Dynasty will have been bought out of its position at some point in time.
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