Investors have come running back to Northern Dynasty Minerals (NYSEMKT: NAK) in the past 12 months, thanks to the sudden turnaround in the mining company wannabe's prospects. New deregulation-friendly leadership at the U.S. Environmental Protection Agency have paved the way for the expansive Pebble Project in Alaska, the world's largest undeveloped copper and gold mine in the world, to continue being developed.
The bulls think the massive untapped potential of the Pebble Project alone justifies carving out a spot for the company in your portfolio. The bears think the long road ahead -- Pebble Project won't come online until 2024 even if everything proceeds smoothly -- provides enough reasons to worry.
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With both sides in mind, is Northern Dynasty Minerals a buy?
The bull case
There are plenty of really big numbers to throw around when discussing the potential of the Pebble Project. For instance, the resource is equivalent to 1.9% of all gold ever mined on planet Earth. There are an estimated 6.44 billion metric tons of measured and indicated resources -- an enormous amount, considering copper and gold deposits are usually measured in pounds and ounces, respectively. It could boost the entire state of Alaska's GDP by 3% compared with 2011 levels and increase nationwide copper production by 20% for decades.
In other words, in the mind of bulls, if investors demonstrate enough patience, then they're bound to profit from owning Northern Dynasty Minerals over the long haul. Pebble may be too big to fail.
That point is really hammered home when considering the value of the estimated copper resource at Pebble, which represents an estimated 58% of the project's total value. Current estimates call for a cash cost of $0.53 per pound of copper production, which would place the mine in the first decile of all operable copper mines globally. While a lot could change between now and 2024, Northern Dynasty Minerals expects to maintain healthy profits once the mine is up and running -- and it may be right. Copper currently trades for well over $2 per pound.
In fact, if the company's resource and cost estimates prove correct, then Northern Dynasty Minerals could potentially be profitable even with sloppy operations and low selling prices.
The bear case
The biggest risk is uncertainty, which can be devastating when casting a shadow over any stock. Investors that buy Northern Dynasty Minerals today would be essentially taking a leap of faith that a long laundry list of tasks will work out in the company's favor by 2024 or shortly thereafter. That may be too big a leap for most investors to make.
Obviously, an undeveloped mine as large as Pebble will require an enormous amount of investment just to get to the production stage. The bad news is that Northern Dynasty Minerals ended the second quarter of 2017 with just $49 million in cash and short term investments. The good news is that CEO Ron Thiessen expressed confidence that a partner could be found and announced before the end of the third quarter of 2017.
That would help, but investors need to be sure Northern Dynasty Minerals doesn't give up too much for financial help and mining expertise. After all, the company's only bargaining chip is the resource itself. Speaking of which, the resource itself may be a reason not to jump into an investment.
Why? Mining companies rely on two categories when discussing minerals present at a mine: resources and reserves. Resources are broken into three categories -- measured, indicated, and inferred -- that have decreasing levels of confidence. Reserves are estimates with even more confidence than resources and signal that a company has completed a good deal of prospect work.
Unfortunately, almost all of the resources touted by Northern Dynasty Minerals are still, at this point at least, in the indicated and inferred resource category. Less than 5% of the copper resource estimate falls into the measured category. Less than 4% of the molybdenum resource estimate is in the most confident category, while only 5.5% of the gold and silver is considered a measured resource. That leaves a lot of room for the possibility that future development work forces the company to readjust its current estimates lower -- perhaps substantially so.
Is Northern Dynasty Minerals a buy?
Northern Dynasty Minerals stock doesn't belong anywhere in my portfolio, and although I don't think most investors should buy it either, I'm open-minded. If you're willing to park a small amount of money into the stock and wait to see what happens 10 years from now, then maybe it can deliver long-term returns for your portfolio. However, it's important for shareholders to reevaluate their position frequently. If in the next few years Pebble encounters too many obstacles on the road to production, or the company readjusts mineral estimates and production costs in a way that puts investors at increased risk of losing their hard earned money, then it may be best to move on.
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