Here's Why Northern Dynasty Minerals Dropped as Much as 39.6% Tuesday Morning

By Maxx Chatsko Markets Fool.com

What happened

Continue Reading Below

Shares of mining company Northern Dynasty Minerals (NYSEMKT: NAK) lost nearly 40% of their value this morning after Kerrisdale Capital Management published an article on Seeking Alpha explaining the merits of its short position. Despite your view of the company, an open-minded investor will see that Kerrisdale Capital Management made many solid points in its argument.

So what

Northern Dynasty Minerals has been jolted back to life by the ascension of Donald Trump to the White House, which promises to lead the loosening of regulations and permitting approval processes for resource extraction in the United States. The company even announced that it had the support of the administration to develop its lone asset: the Pebble Project in Alaska, one of the largest undeveloped reserves of gold and copper in the world, which was hindered by past environmental rulings. That helps to explain the stock's meteoric 822% rise in the prior year up until yesterday, but Kerrisdale Capital Management thinks investors are getting ahead of themselves.

Image source: Getty Images.

Key points made in the article hinge on the economics of the Pebble Project, the financial health of Northern Dynasty Minerals, and the underappreciated political risk of developing the asset. Indeed, while the asset holds an estimated 70 million ounces of gold, it's spread over 23,000 square miles at a concentration that is half to one-third that of the most expensive American gold mines in operation today. That doesn't bode well for profitable production, but that fails to consider the risks that could occur before that milestone.

Continue Reading Below

Regulators, politicians, and voters in Alaska have the ability to delay or stop the development of the Pebble Project, regardless of what federal agencies green light. Even if development is permitted, investors are looking at a long and protracted timeline before the first ore is extracted and sold. Given the expected high costs of development and extraction, production may not even be profitable. Worse, many global jewelers have pledged not to buy gold from the mine should it enter production.Simply put, it's complicated.

Now what

While Kerrisdale Capital Management has a short position in Northern Dynasty Minerals, it's main argument should not be overlooked by investors: The successful development of the Pebble Project is much more complex than looking at what color tie is sitting in the Oval Office. At the end of the day, economics and public sentiment may decide its fate. Neither appears to be on the company's side.

10 stocks we like better than Northern Dynasty Minerals
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Northern Dynasty Minerals wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

Maxx Chatsko has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.