Northern Dynasty Minerals (NAK): Looming Dilution Potential, 6 More Downside Risks

by Sonya Colberg, Senior Editor - 8/16/2016 10:40:30 AM

After a decade of controversy over its proposed Pebble mine, Northern Dynasty Minerals (NAK) is still absolutely nowhere.

At first glimpse, unwary investors might expect significant news because the stock has practically doubled over a month to unsustainable levels.

The Pebble property covers 153 square miles of land in Alaska, taking in at least 15 square miles for the proposed mine operation and tailings ponds. The project would place one of the world's largest copper and gold mine against the world's largest salmon fishery and environmental concerns.The project has not yet entered the permitting phase.

So there's no real news now and this stock has no upward trajectory left. Investors may find other viewpoints here and the company website here. Meanwhile, TheStreetSweeper highlights seven key downside risks to NAK investors:

*1. Hello, Momentum Traders

Momentum traders keyed in on the stock on Monday, July 11, when Insider Monkey noted that Sprott Asset Management disclosed a 5.45 interest in NAK. Volume jumped to 5.8 million, more than double the shares traded the Friday before - the day of the company's Sprott filing. The share price closed 29 percent higher at $0.54.

(Source: Yahoo)

But by July 29, Sprott had already begun selling part of its NAK stock. The firm disclosed its ownership had dropped to 3.9% or 10,490,200 shares .... a sale of 4,234,300 shares.

*2. Pushing NAK

Then - and we have to extend congratulations here on the apparent huge following and ton of money made -  Rick Rule, with Sprott Resource Corp. and Sprott Holdings, suggested the stock during a BNN interview on Aug. 11.

(Source: BNN)

According to his comments on BNN: "It is an ultra-high risk optionality play. One of the biggest, and highest grade copper gold deposits in the world, it is subject to a legal and political dispute. In our opinion, a political resolution with Alaskan Indigenous owners would solve the legal dispute, and both sides have ample incentive to reach a mutually beneficial agreement. This will be a binary outcome, a huge win, or a substantial loss, and the time frame is indeterminate."

Some of the air had gone out of the stock from the time of the Sprott disclosure until Mr. Rule's suggestion last week ... But NAK again rose - notwithstanding the fact that Sprott Resource Corp. itself extended its losses recently, reporting $17.5 million net loss in the second quarter. Traders apparently also didn't notice Sprott's stock chart:

(Source: Yahoo)

Indeed, the suggestion from Sprott advanced the NAK stock runup.

Congratulations to those who got in on the momentum trading over the past four weeks or so.

Congrads to Sprott ... likely poised to sell more stock right now.

Keep in mind that this trade activity is based on - indeed in spite of - the same old, same old ...

*3. Same Ol' Losing Company

NAK is the very same company it was on Aug. 12.

The day after Mr. Rule included NAK among his investment suggestions, NAK finally had some real news. On Aug. 12, the company reported it had lost millions again.

NAK filings also disclosed it is quickly burning through its minimal cash stash:

(Source: Company SEC filing)

So with less than two quarters of cash left, the company executed a stock offering...

*4. Share Offering

With NAK starving for cash by the time of the quarterly report, it had no choice but to drum up some cash somehow, some way.

So in June, the company came out with a stock offering that raised $17.1 million (here).

Northern Dynasty Closes $17.1 Million Offerings

June 10, 2016, Vancouver, BC – Northern Dynasty Minerals Ltd. (TSX: NDM; NYSE MKT: NAK) (“Northern Dynasty” or the “Company”) reports that it has closed its previously announced prospectus offerings of 38,000,000 units of the Company at a price of C$0.45 per unit (the "Offering") which includes 4,666,667 units issued pursuant to the full exercise of an over-allotment option granted to the agents, for gross proceeds to the Company of $17,100,000.

On July 5, 2016, NAK closed a $2 million private placement of 4.4 million units (here): July 5, 2016 Vancouver, BC -- Northern Dynasty Minerals Ltd. (TSX: NDM; NYSE MKT: NAK) ("Northern Dynasty" or the "Company") announces that it has completed a private placement of 4,444,376 Units, each consisting of one share and one warrant of the Company at a price of $0.45 per Unit for gross proceeds of approximately $2 million. The warrants are exercisable into one common share of the Company at the exercise price of $0.65 per share until June 10, 2021. The shares and warrants are subject to applicable resale restrictions, including a four month hold under Canadian legislation. The warrants will be listed for trading on the TSX once the hold period expires.

The company registered stock warrants on July 14, 2016 (here). The warrants for 11,072,222 shares are issuable at C$0.65 per share:

This prospectus supplement (the “Prospectus Supplement”), together with the registration statement on Form F-3 (File No. 333-209921) filed with the SEC on March 4, 2016 and amended on March 22, 2016 (the “Registration Statement”), registers the issuance of the Registered Warrant Shares issuable pursuant to exercise of up to 11,072,222 Regulation S Warrants by U.S. investors who purchase the Regulation S Warrants in the public market on the TSX.

S-1


The Unit Offering was completed concurrently with the offer and sale of 2,222,222 Units (the “Concurrent Offering Units”) at the Offering Price for additional gross proceeds of $1,000,000 (the “Concurrent Unit Offering”).

 

All well and good but now considering the warrants, a tremendous stock overhang awaits investors in October.

Undoubtedly much more potential dilution lies ahead; a raise of $20 million or so is nothing compared to as much as $5 billion needed to undertake the proposed Pebble mine in Alaska's Bristol Bay.

*5. Pebble Mine Project

The proposed Pebble mine project is a matter of enormous debate and speculation spanning nearly a decade. The project remains on hold but envisions a large open pit mine within the headwaters that support the world's largest sockeye salmon runs.

Yet, in its latest filing, NAK states it "has not yet determined whether the Pebble Project contains mineral reserves that are economically recoverable."

After years of repeatedly saying permit applications were just around the corner ... the permit application is still just around the corner. The company recently noted again that it is prepared to "initiate federal and state permitting under the United States National Environmental Policy Act."

A group of native tribes from the region approached the US Environmental Protection Agency in 2010 and asked the agency to block the mining by invoking the Clean Water Act's section 404(C). The EPA did three year's worth of studies, accepted over a million comments, held public meetings and had scientists peer-review the data. The agency concluded that Pebble Mine would threaten the salmon.

"Opposition to the mine is stronger than ever," Salmon State Intiative director Tim Bristol said in an Aug. 15 telephone interview with TheStreetSweeper.

The mine controversy has raged on for a decade. The debate spawned opposition groups such as "Save Our Salmon" and "Save Bristol Bay." Tiffany & Co., Helzberg Diamonds and other jewelers joined the fray as they pledged not to buy gold from the mine.

Meanwhile, NAK suffered major hardships. Its Pebble partner Anglo-American withdrew its 50% stake in the mine project in September 2013 and Rio Tinto gifted its 19.1 % stake in NAK to two Alaskan charities.

NAK is in ongoing litigation over the EPA issue but states: "Northern Dynasty is confident that Pebble can be developed in an environmentally sound and socially responsible manner, consistent with Alaska and US standards."

NAK will have to wind through over 67 state and federal permits before construction could be started and over a dozen federal and state entities would oversee the process.

But Mr. Bristol indicated the going will remain tough for NAK as Alaska recently recorded the fourth largest salmon run in history and local fishermen are happy.

"I would say Pebble is farther away from obtaining social license in Alaska and the Bristol Bay region than they’ve ever been," said Mr. Bristol.

"I think people in that region and particularly people in Alaska have decided the blue chip investment is the wild salmon fishery," added Mr. Bristol.

*6. Deepening: Net Losses

The trend for NAK's net income goes from bad to really bad to horrible. Net losses in 2015 hit the highest level in five years:

(Source: The Wall Street Journal)

The financial situation has prompted auditors to issue a "going concern" notice.

Deloitte discussed "material uncertainties that raise substantial doubt about the Company’s ability to continue as a going concern."

 

*7. Copper Prices Fall

Now, the chief component driving the Pebble project is declining in value. Indeed, global copper prices are dropping in the midst of an oversupply.

(Source: Bloomberg)

*Conclusion:

NAK is facing seemingly insurmountable odds as it pursues Pebble mining  - the loss of funding partners, nearly immediate stock selling after a major investor buy, massive local opposition, uncertain economic recovery, net losses, cash declines accompanied by stock offerings and millions of shares worth of further potential dilution expected less than two months away. Those issues and unanswered questions suggest the expected multi-billion-dollar Pebble mine will never get built but the risks will grow. Meanwhile momentum traders ride the stock up and back down again as average retail shareholders twist in the wind. We expect this stock to get hammered back to a more realistic valuation of $0.50 per share.

 

* Important Disclosure: The owners of TheStreetSweeper hold a short position in NAK and stand to profit on any future declines in the stock price.

  • Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.
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