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Vol. 16, No. 13 Week of March 27, 2011
Providing coverage of Alaska and Northwest Canada's mineral industry

Mining News: Pebble partner issues pre-sale appraisal

Releasing an economic assessment of the huge Pebble Project, Northern Dynasty’s managers tout junior’s merits as takeover target

Shane Lasley

Mining News

Northern Dynasty Minerals Ltd. has hung a “for sale” sign on its 50 percent stake in the enormous Pebble copper-gold-molybdenum project. Since Wardrop Engineering Inc. completed an appraisal of the Southwest Alaska deposit, executives have touted the company’s merits as a takeover target.

“Given the state of the current industry, the competition in the industry and the commodity market conditions we believe that going forward there will be competitive interest in Pebble from a broad range of potential acquirers,” Northern Dynasty Executive Chairman Robert Dickinson informed investors at BMO Capital Markets 2011 Global Metals and Mining Conference.

Wardrop’s appraisal was in the form of a preliminary assessment that investigates the economic value of Pebble, and highlights Northern Dynasty’s value in light of additional capital Anglo American plc must spend to earn its 50 percent stake in the Southwest Alaska project.

The study investigates three potential development cases:

Investment decision, which describes an initial 25-year open-pit mine life upon which a decision to initiate mine permitting, construction and operations may be based;

Reference, which contemplates 45 years of open-pit mine production; and

Resource, which is based on 78 years of open-pit mine production and seeks to assess the longer-term value of the project in current dollars.

All three scenarios demonstrate robust economics, and could provide a major with a steady stream of base and precious metals for decades.

“After many years of exhaustive geological, environmental and socioeconomic study, as well as intensive engineering effort, this preliminary assessment confirms Pebble’s potential as a modern, world-class mine that provides decades of benefits to shareholders, to the people and communities of Alaska, and to the U.S. and global economies,” said Northern Dynasty President and CEO Ron Thiessen.

The 45-year case produces 31 billion pounds of copper, 30 million ounces of gold, 1.4 billion pounds of molybdenum, 140 million ounces silver, 1.2 million kilograms (2.6 million pounds) of rhenium and 907,000 ounces of palladium, while mining only 32 percent of the total Pebble mineral resource.

Potential suitors

Though Dickinson did not specify any company as a potential suitor to buy out Northern Dynasty, he dropped the name Rio Tinto plc more than once during his March 1 presentation.

“Pebble is a unique and valuable asset, and we believe it to be very attractive to a wide spectrum of the world’s major miners and smelter groups – both, as you know, have very healthy balance sheets and are actively seeking major mining opportunities. We know the majors are looking to replace dwindling resources with their development pipeline, and we also know this is not occurring through the traditional exploration,” the Northern Dynasty chairman said. “Most of these types of major projects are developed by consortiums of major groups; such as Anglo American; such as Rio Tinto and of course others.”

Rio Tinto already owns nearly a 19.9 percent of Northern Dynasty, the maximum allowable stake without violating the company’s shareholders rights plan.

Dickinson also pointed out the geological similarities between Pebble and Bingham Canyon, a porphyry copper mine owned by Rio Tinto.

“Bingham has operated continuously for more than 100 years and is the most profitable mine in the Rio Tinto network. It produces more than 20 percent of the United States’ copper needs and in addition produces significant volumes of gold, molybdenum, silver and rhenium – and all of these important metals are found at Pebble,” he expounded.

Aside from its nearly 10 percent stake in Pebble, Rio Tinto has all but pulled out of Alaska in recent years. Starting with the sell-off of its 70 percent interest in the Greens Creek silver mine in 2008, the mining giant has systematically liquidated its Alaska assets. These include the copper-rich Ambler volcanogenic massive sulfide project and its back-in right at Kiska Metals Corp.’s Whistler porphyry gold-copper property. The company also optioned Copper Joe – a copper-gold-molybdenum prospect it discovered south of Whistler in 2006 – to Kiska.

While Pebble’s 80 billion pounds of copper and 5.6 billion pounds of molybdenum makes it an attractive asset for majors looking to add base metals to their portfolios, its 107 million ounces of gold also may be a target for a major focused on the yellow metal.

“Pebble is a game-changer; it will be extremely valuable for base or precious metals companies looking to replace dwindling reserves to their production pipelines,” Dickinson touted.

Barrick Gold Corp. – which already has a foothold in Alaska through its 50 percent stake in the Donlin Creek gold project – has several copper-gold porphyry projects in its portfolio. Last March Barrick spent US$474 million to buy a 25 percent interest in the Cerro Casale in Chile from Kinross Gold Corp., increasing its stake in the copper-gold project to 75 percent. With its 23.2 million ounces of gold and 5.8 billion pounds of copper, Cerro Casale is much smaller than Pebble.

“Geologically, Pebble is a superior asset. It is the fifth-largest porphyry copper deposit ever discovered and, at the same time, is the world’s single-largest deposit of gold,” Dickinson explained. “Pebble is precisely the kind of world-class resource that most of the major mining companies are competing for now.”

Robust economics

The economic study completed by Wardrop envisions an open-pit mine with a flotation circuit and secondary gold recovery. Mill throughput, according to the assessment, is estimated to be 219,000 tons per day for the first 25 years, rising to 229,000 tpd for the 45-year and 78-year cases.

Over the 45-year base case, annual production is envisioned to be 690 million pounds of copper, 667,000 ounces of gold, 31,000 pounds of molybdenum, 27,000 kilograms (58,000 pounds) of rhenium and 20,000 pounds of palladium.

“The Pebble Project is among a handful of mineral projects around the world with the potential to meaningfully enhance global production of copper, gold and molybdenum at a time when worldwide demand is increasingly outstripping supply,” said Thiessen.

Dickinson told investors attending the BMO Conference that the Wardrop study demonstrates a negative cash cost of US11 cents for every pound of copper produced at Pebble after byproduct credits.

Using long-term metal prices of US$2.50/lb copper, US$1,050/oz gold, US$13.50/lb molybdenum, US$15/oz silver, US$3,000/kg rhenium and US$490/oz palladium, the study foresees robust economics for the companies that develop Pebble.

For the Pebble Partnership, the 45-year case yields a 14.2 percent pre-tax internal rate of return, a 6.2-year payback on initial capital investment and a US$6.1 billion pre-tax net present value at long-term metal prices and a 7 percent discount rate.

At current prevailing metal prices, the 45-year scenario yields a 23.2 percent pre-tax IRR, a 3.2-year payback on initial capital investment and a US$15.7 billion pre-tax NPV at a 7 percent discount rate.

Considering Anglo American is expected to have a remaining balance of about US$1 billion it must spend to earn its 50 percent stake in the Pebble Project at the time construction begins, the economics for Northern Dynasty is even more robust.

Dickinson told investors that Anglo American has contributed US$325 million so far, and the project’s 2011 budget is estimated to be between US$90 and US$95 million.

Based on construction costs of US$4.7 billion estimated in the Wardrop study and discounting Anglo American’s remaining commitment, Northern Dynasty estimates its portion of capital to build a mine at Pebble to be about US$1.85 billion.

For the Vancouver, B.C.-based junior’s 50 percent interest in the Pebble Project, the 45-year case yields an 18 percent pre-tax and 15.4 percent post-tax IRR, a 4.7-year pre-tax and 5.3-year post-tax payback on initial capital investment, and a US$3.6 billion pre-tax and US$2.4 billion post-tax NPV at a 7 percent discount rate at long-term metal prices.

At current prevailing metal prices, Northern Dynasty’s 50 percent interest in Pebble yields a 30.2 percent pre-tax and 25.1 percent post-tax IRR, a 2.6-year pre-tax and 3.1-year post-tax payback on initial capital investment and an US$8.3 billion pre-tax and US$5.6 billion post-tax NPV at a 7 percent discount rate.

“How do you really value a project that is going to kick out $2 billion (annually) at long-term metal prices for a very long time – perhaps well over 100 years?” Dickinson queried.

Attached disclaimer

All the scenarios put forth in the Wardrop study are based on building an open-pit mine to extract the ore at Pebble, which may not be the ultimate mine-plan put forth by the Pebble Partnership.

“Given its size, structure and polymetallic nature, the Pebble deposit presents a great deal of flexibility in near-term and long-term development options,” Northern Dynasty explains.

The company said that while near-surface mineral resources in the western portion of the deposit are most efficiently developed through open pit methods, the potential exists for underground mining (in particular block-caving) to emerge as the preferred mining method for the deeper and richer Pebble East deposit.

Northern Dynasty’s economic assessment was delivered with the disclaimer that it does not represent the views of its partner in the project. A point underscored by Anglo American CEO Cynthia Carroll during a March 3 presentation in Anchorage.

“And here I would like to be clear that the Preliminary Economic Assessment issued last week by our partner in the Pebble Project, Northern Dynasty Minerals Ltd., represents just one view of the possibilities of the project. Northern Dynasty (managers) feel they need to provide information about the project to their shareholders even though that information is still preliminary,” Carroll said during a breakfast meeting sponsored by the Alaska Resource Development Council. “The Pebble Partnership will only publish a detailed plan once that has been properly developed and approved by Pebble’s board. The fact is that the Pebble Partnership is still studying multiple options as it works towards completion of a pre-feasibility study in 2012.”

The Pebble Partnership, under the leadership of CEO John Shively, has been careful not to feed the rumor mills with project scenarios until a final mine-plan is engineered and can be presented to and receive feedback from the stakeholders in the Bristol Bay region.

“John Shively has made it repeatedly clear that when the Partnership does have a preferred option, he and his team will engage in extensive further consultation in advance of taking any proposal to permitting,” Carroll said.

Though Northern Dynasty has not disclosed why it released the Wardrop study ahead of a final mine-plan signed off by all the parties involved in the Pebble Project, all indications are the junior is looking for a global company to buy out their 50 percent share of the venture in the near term.

“Our original premise on this project is that we felt Northern Dynasty would be at the project until we felt we were at a position that we weren’t adding any more value to the project with our input. And that we would be able to demonstrate the true value of this so that the major mining companies would probably look at this in some sort of a corporate transaction,” Thiessen told investors at the BMO conference.

Dickinson implied that such a transaction may be coming soon.

“As management, we believe there is an opportunity for Northern Dynasty to capture the longer term value of our interest in this project in the months ahead. And we, at Northern Dynasty, have the resources, we have the people, and we have the motivation to ensure that investors in Northern Dynasty receive maximum value for their shareholdings,” he said in concluding his remarks.

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