Northern Dynasty Refutes Short Seller Claims Short Seller’s Report Based on Misstatements, Inaccuracies and “Anonymous Sources” Northern Dynasty’s Pebble Project Has Been Assessed by Independent Experts as a Globally Important Copper/Gold Asset
Northern Dynasty Refutes Short Seller Claims
Short Seller’s Report Based on Misstatements, Inaccuracies and
“Anonymous Sources”
Northern Dynasty’s Pebble Project Has Been Assessed by
Independent Experts as a Globally Important Copper/Gold Asset
with Multiple Development Options for Commercial Success
February 17, 2017, Vancouver, BC - Northern Dynasty Minerals Ltd. (TSX: NDM; NYSE
MKT: NAK) ("Northern Dynasty" or the "Company") today responded to misleading criticism
of its Pebble copper and gold project in the February 14, 2017 report by Kerrisdale Capital
Management LLC (“Kerrisdale” or the “Short Seller1”).
The Company and its board have evaluated each of the Short Seller’s claims and believe
they are unfounded, contain numerous errors and unsupported speculation and
demonstrate a lack of understanding of the Company’s business. The Company will
consider and vigorously pursue any and all actions and remedies available to it to protect
the interest of its shareholders.
Summarizing the Short Seller’s Claims
The Short Seller, Kerrisdale, would apparently have you believe that Pebble, as one of the
world’s largest deposits of copper and gold, is worthless despite the fact that mining companies
are profitably mining lower grade ore within a few hundred miles of it as well as at other
operations around the world. The Short Seller would apparently have you believe that Anglo
American, a major mining company which spent some US$600 million on Pebble, but was
ultimately unwilling to spend the full $1.5 billion required to earn a 50% interest in Pebble,
thinks the project is “worthless”. The Short Seller would apparently have you believe that
Pebble’s challenges from the US Environmental Protection Agency (“EPA”) are deserved, or
that it is the first mining project to face regulatory challenges, despite what has been described
by the Wall Street Journal as the EPA’s regulatory “lawlessness” which they based on “sham”
science (January 23, 2017, WSJ). The Short Seller would apparently have you rely on
anonymous hearsay, supposedly from employees of Anglo American, who are making comments
at odds with the public statements of the major mining company’s own senior executives.
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Investors who read the Short Seller’s report should consider the following:
Kerrisdale stands to realize significant gains in the event that the price of the Company’s
stock declines.
Kerrisdale is not a mining company and does not disclose any record of success in
mining investments or issuing mining valuation or investment reports. On the contrary,
Kerrisdale has a track record of aggressive short selling and activism. In contrast,
Northern Dynasty’s Pebble team has extensive experience in mining and a formidable
track record of success in developing and operating mines internationally.
Kerrisdale relies on anonymous co-authors whose mining credentials, if any, Kerrisdale
has not disclosed and who likewise may hold or have held short positions in Northern
Dynasty. Specifically, Kerrisdale has not disclosed if these anonymous authors have any
requisite technical qualifications or practical mining experience to substantiate the claims
of the short report. In contrast, Northern Dynasty publicly files technical reports which
have been certified by named, independent, experienced and reputable Qualified Persons
(as defined by securities laws) who have certified the accuracy and completeness of these
reports. An internationally recognized engineering firm conducted and compiled an
extensive and independent Preliminary Assessment (also referred to as a Preliminary
Economic Assessment, or “PEA”) of the Pebble Project on behalf of Northern Dynasty.
This PEA, published in 2011, showed the project possesses significant value. While the
analyses of this assessment now require updating, it remains a source of much useful
information and is available for download at www.sedar.com. The PEA shows the large
mineral endowment and potential of the Pebble Project.
Kerrisdale’s short report purports to develop a zero value thesis without requesting or
having had access to the necessary and extensive technical, analytical, geological and
economic information that Northern Dynasty’s Qualified Persons used. No Kerrisdale
personnel have visited the Pebble Project or had discussions with Northern Dynasty’s
technical team or executives.
Kerrisdale is apparently a troubled organization, which has recently been in the news for
major client and staff defections and alleged senior staff personal misconduct.
Consider the Reaction to the Short Seller’s Report by Independent Analysts2:
From 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.
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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%.
- Craig Hutchison, P. Eng, TD Securities Inc. February 16, 2017
From Stansberry’s Investment Advisory:
Kerrisdale offered no new technical or scientific evidence. On the call, they labeled themselves
as market generalists with no background in the mining industry. They made vague references to
engineers, but would not disclose their names or credentials.
One of their main arguments is that mining giant Anglo American and other large miners walked
away from the project because Northern Dynasty's resource is worth nothing. We disagree.
We think investors should be very skeptical of investment research that's published by any entity
whose business depends on promoting a position (long or short) after establishing one – whether
it's a hedge fund manager with a history of drug abuse or an established industry titan. The fact
is that having a bunch of money on the line (like Bill Ackman with Herbalife) tends to warp
investors' judgement.
- Stansberry's Investment Advisory. February 2017
From Very Independent Research:
The short seller report was neither a mining technical report nor very much new.
- John Tumazos Very Independent Research, LLC. February 15, 2017
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SETTING THE RECORD STRAIGHT
Pebble is One of the World’s Largest Undeveloped Copper and Gold Resources
The Company will continue this discussion by reconfirming that the Pebble Project is one of the
world’s most important mineral resources, when measured by aggregate contained metals. The
current estimate of these mineral resources at a 0.30% copper equivalent (CuEQ)3 cut-off grade
comprise:
6.44 billion tonnes in the combined Measured and Indicated categories5 at a grade of
0.40% copper, 0.34 g/t gold, 240 ppm molybdenum and 1.66 g/t silver, containing 57
billion pounds of copper, 70 million ounces of gold, 3.4 billion pounds of molybdenum
and 344 million ounces of silver; and
4.46 billion 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 24.5 billion pounds of copper, 37
million ounces of gold, 2.2 billion pounds of molybdenum and 170 million ounces of
silver.
How does this compare to other similar assets?
The Short Seller’s contention that Pebble is a “low grade” deposit is not supported by the data.
Pebble has an average CuEQ grade of 0.71%. The following graph shows Pebble in comparison
to other major producing and non-producing copper projects. It shows that Pebble is in the top
quartile of these deposits when ranked based on CuEQ grade.4
5
Comparison of Grades (% CuEQ) of Copper Deposits
Further, the sheer scale of this immense copper/gold asset has attracted major mining company
interest and continues to do so. Pebble is the world’s largest undeveloped copper and gold
resource in terms of contained metal. The deposit hosts the 9th largest copper resource and the 2nd
largest gold resource in the world, as shown in the graphs below. The contained metal of this
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one deposit matches the reported reserves of many of the largest mining companies in the world.
Bringing Pebble into production will be transformative for its shareholders.
Mine Planning and Economic Assessment
Like many large mining projects, the Pebble Project has had various owners, partners and major
investors over the years such as Teck Resources, which owned Pebble before the big exploration
successes at Pebble in 2004 to 2007 massively expanded the resource. Teck Resources continues
to hold a royalty interest in part of the deposit after its 2002 sale of Pebble. With each such party
came different priorities and interests, including with respect to mine development, timelines,
scale and approach. What has never been denied is the potential and quality of this unique asset,
nor Northern Dynasty’s full commitment to work with interested parties to develop it.
Northern Dynasty’s 2011 PEA demonstrated based on certain assumed mining design parameters
(mine plan, mill through put etc.) that Pebble has a potential net present value measured in the
billions of dollars and a mine life of 40 to 80 years. This long-lived mining project did not even
deplete the full Pebble resource. The PEA was prepared by Wardrop Engineering Inc., now an
affiliate of Tetra Tech Inc., an internationally recognized engineering group. The PEA showed
that the commercial potential of a mine at Pebble is good at many commodity price and cost
assumptions. Like all resource extraction projects, commercial viability is largely dependent on
the outlook for the price of the commodity. This is especially true where the outlook has to span
a period measured in decades due to the immense size of the mineral deposit. Northern Dynasty
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believes in the long-term demand for copper and gold and is highly confident that Pebble’s
viability will be demonstrated when it files the final mine design (as it evolves through the
iterative permitting process) after the permitting process has been completed.
Contrary to the Short Seller’s report, no mine planning scenario with a US$13 billion capital
estimate was ever finalized, approved or adopted by Northern Dynasty or Anglo American as its
50% partner in the Pebble Limited Partnership (“Pebble Partnership”). In fact, Pebble
Partnership staff, led by secondees from Anglo American, recognized the flaws with this work
and continued studying development alternatives. Further, a review of a preliminary draft
US$13 billion mine planning scenario by an independent engineering firm commissioned by
Northern Dynasty identified issues with that study and identified savings that reduced the
preliminary capital estimate by US$4 billion. As is well-understood by those with technical
knowledge of the industry, there are a large amount of analyses conducted on very different
assumptions of mine scale and costs to test development scenarios. The conclusions to be drawn
from such work are used to inform mine planning and design and such work is not intended to
represent the “most likely outcome” case for a mine. It is important to note that the Pebble
Partnership has considered hundreds of preliminary mine design scenarios with different design
components, operating parameters and scales.
The 2011 PEA is the only formal published report of the Pebble Project which assesses
economics at a preliminary level.
The 2011 PEA was based on an internal Pebble Partnership study, known as the 2010 Value
Seeking Phase study (“VSP”) that used similar mining parameters as the PEA. The PEA
projected Pebble to have significant asset value. Based on the development alternatives identified
in that study, Anglo American, following completion of the VSP, continued to invest some
US$320 million between 2010 and 2013 in Pebble until its withdrawal from the project in 2013.
Anglo American’s Termination
During the 2013 mining downturn, Anglo American announced that it was reconsidering its
development project pipeline in light of market conditions and was unwilling to invest another
$900 million to earn a 50% interest in the Pebble Project and therefore terminated its earn-in
option. At the time, Anglo American faced well-known capital constraints as a result of the
commodity downturn and negative capital market conditions. In regards to that termination,
newly appointed CEO Mark Cutifani cited a need to manage capital investment on its pipeline of
long dated projects, while publicly referring to Pebble as “a deposit of rare magnitude and
quality”.
Even after its decision to withdraw from the project, Anglo American maintained a positive
outlook on Pebble. “Our views on Pebble as a mining project are unchanged. … We wish the
project well, and express our thanks to those who have supported Pebble…. our decision to
withdraw from the project is the result of an internal prioritisation of the many projects that we
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have in our portfolio,” Anglo American spokesperson James Wyatt-Tilby told Bloomberg on
September 30, 2013.
The Short Seller also claims that the Pebble Project was “pushing the boundaries” of
engineering. That is simply untrue.
While the scale of Pebble engenders a significant, multi-component project, the scale and the
engineering concepts incorporated in its development are not unique and are based on multiple
similar mine developments around the world. Pebble sits at approximately 1,000 feet above sea
level in rolling terrain, 60 miles from tide water that is ice-free 11 months of the year. After
more than a decade of detailed investigation and analysis, no critical engineering issues have
been identified with mine development, ore processing, and infrastructure. Thus, in fact, the
conditions at Pebble are far less challenging than that faced by mines successfully developed in
South America (high elevations, precipitous valleys, limited water supply), the Canadian Arctic
(temperature extremes and severe logistical challenges), southeast Asia (massive precipitation
and excess water balance conditions), and in northwest Alaska (permafrost, logistics challenges
due to short shipping seasons and temperature extremes). The 2011 PEA work was based on
customary and proven mining technologies.
Permitting the Pebble Project
Every mining project has opponents. However, Pebble enjoys considerable support for its efforts
to advance the Pebble Project in Alaska today, including among elected officials, business
interests, and regional and Alaska Native communities. The Short Seller tries to focus attention
on the project’s opponents while deliberately neglecting to mention the significant support the
Pebble Project has had in Alaska, including opposition to what has been widely regarded as
unfair efforts by the EPA to stall the project. Importantly, the State of Alaska was a co-plaintiff
in PLP’s ‘statutory authority’ case against the EPA.
Permitting and developing Pebble will be a multi-year process with multi-decade or multi-
generational payoff. We are entirely committed to advancing the political and public consensus
necessary to support a positive permitting outcome. The Company is advancing a comprehensive
strategy to address EPA actions and stakeholder concerns through potential changes in project
design, enhancing strategic partnerships with key constituencies and ensuring the project delivers
significant benefits to the people of Bristol Bay and Alaska. What is absolutely clear is that many
Alaskans are concerned about the EPA’s pre-emptive actions, and they want the project to be
fully but fairly evaluated through a comprehensive federal/state permitting process under the US
National Environmental Policy Act (“NEPA”).
The Company believes it will have the opportunity to appropriately respond to concerns raised
by regulators, and to demonstrate that its final design will satisfy all federal and state
environmental regulations and permitting requirements.