Could A Class Action Lawsuit Hurt Northern Dynasty Minerals LTD (NYSEMKT: NAK)?


Northern Dynasty Minerals LTD (NYSEMKT: NAK), an industrial metals and minerals company primarily engaged in the exploration and development of mineral properties in the U.S., was just hit with some bad news, and its shares could fall further. As of March 3, 2017, NAK was down just over 30% YTD and over 50% over the past month, while the industrial metals and minerals industry was up 11.81% YTD and down just 1.11% over the past month.

Here’s a look at NAK’s performance since late-December 2016:

Source: TradingView

Some Catalysts Pushed Northern Dynasty Shares Lower

In January 2017, Northern Dynasty announced it entered into an agreement with Cantor Fitzgerald Canada Corporation, TD Securities Inc. and BMO Capital Markets, to purchase 13.52M common shares at $1.85 per offered share. According to NAK, “Proceeds of the Offering are anticipated to be used for (i) advancement of the Company’s multi-dimensional strategy to address the pre-emptive regulatory action of the U.S. Environmental Protection Agency under Section 404 (c) of the Clean Water Act; (ii) to prepare the Pebble Project for the initiation of federal and state permitting under the U.S. National Environmental Policy Act; (iii) environmental monitoring, engineering and environmental studies, field investigations and related technical studies to finalize a proposed development plan for the Pebble Project, (iv) enhanced outreach and engagement with political and regulatory offices in the Alaska state and U.S. federal government and among Alaska Native partners and broader regional and state-wide stakeholder groups, (v) Alaskan corporate, tenure and site maintenance, (vi) general corporate purposes, and (vii) working capital requirements.”

Thereafter, NAK announced the closing of the $37.44M bought deal offering. The company offered a total of 20.24M common shares, which were sold at $1.85 per share, which amounted to gross proceeds of $37.44 million. With this raised capital, the company would be able to grow its Pebble Project development, and it would use the capital for other needs, as stated above.

Since the bought deal offering diluted the company’s common stock, the corporate action pushed shares lower, before rebounding above $3 per share a few trading sessions after.

However, there was some bad news for NAK, after Kerrisdale Capital Management, an independent New York-based investment firm, indicated Northern Dynasty Minerals’ Pebble Project was not commercially viable. The report also stated, “With little cash on its balance sheet and few people under its employ, Northern Dynasty needs massive financial and operational backing to even consider developing the Pebble deposit. But what potential partner would willingly bear such a wide range of unquantifiable and potentially catastrophic regulatory risks? More importantly, what potential partner would gladly incinerate blns of dollars of value by building a mine that can’t produce an adequate return on capital? We believe that Northern Dynasty is on its own. It will never develop the Pebble deposit and has no other source of potential value; it’s worthless.”

That being said, NAK fell significantly after the report released. On February 14, 2017, NAK fell to a low of $1.92, or nearly 40% below the previous day’s close. The stock ultimately ended down just over 21% on the day.

Here’s a look at NAK’s performance around the release of the report:

Source: TradingView

According to Craig Hutchison, P. Eng, of TD Securities, “Following the election of President Trump, [NDM] shares have outperformed the broader base metal market on the view that the EPA will withdraw its preemptive objections to Pebble, allowing the project to go through the formal NEPA permitting process. It is important to note that even prior to Trump’s election, the company had announced planned mediation discussions with the EPA to resolve its dispute over the FACA case. Our view is that EPA will withdraw its objections, allowing the project to proceed to permitting by late-2017 or early-2018. In terms of the project economics, the Short Seller’s report cites that work completed by Anglo American and third-party engineers indicated that the upfront capital cost of Pebble would be roughly US$11-13bln. Importantly, no context around the project’s size and scale was provided with the estimate, which we view as misleading. The estimate compares with the US$4.7bln in upfront capex outlined in Pebble’s 2011 PEA for a 200,000tpd operation. We assume US$6.5bln of capex, with a 10%NAV estimate of US$1.24bln. Assuming a resolution with the EPA in H1/17, the next critical step, in our view, will be the re-establishment of a partnership, which management is confident can be achieved this year. We expect the establishment of a partnership to be followed by the publication of a PFS, which could target a smaller higher-grade mine development scenario reducing both the capex and permitting objections. We maintain our C$5.00 target price and upgrade our rating to SPECULATIVE BUY from Hold to reflect our return-to-target of 49%.”

The company looked to falsify the report’s claims with some of its own research. On February 16, 2017, NAK estimated: 6.44B tonnes in the combined measured and indicated categories at a grade of 0.40% copper, 0.34 g/t gold, 240 ppm molybdenum and 1.66 g/t silver, containing 57B pounds of copper, 70M ounces of gold, 3.4B pounds of molybdenum and 344M ounces of silver. Additionally, it indicated 4.46B tonnes in the inferred category at a grade of 0.25% copper, 0.26 g/t gold, 222 ppm molybdenum and 1.19 g/t silver, containing 24.5B pounds of copper, 37M ounces of gold, 2.2B pounds of molybdenum and 170M ounces of silver.

With that in mind, its research did not calm investors and the stock is still trading well off of its 52-week highs.

Moreover, on March 2, 2017, Khang & Khang LLP announced the filing of a class action lawsuit against Northern Dynasty Minerals. Now, this could further hurt NAK shares and investors may be scared to invest in the company.

The Bottom Line

Northern Dynasty Minerals received bad news recently, leading to shares falling significantly in just a matter of months. Kerrisdale Capital’s report indicated NAK was “worthless” and Khang & Khang LLP filed a class action lawsuit against the company, which could push shares lower. With that in mind, those who are still bullish in the mining industry and are considering an investment in NAK should be highly risk-tolerant, given the negative news in the name, and know that this would be considered a contrarian trade.


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