Pebble PEA makes a big splash (March 07, 2011)

February was a busy month for Northern Dynasty Minerals (NDM-T, NAK-X) and Anglo American (AAL-L) at their gigantic Pebble copper-gold-molybdenum project in southwest Alaska, said by many to be one of the largest undeveloped copper-gold porphyry projects in the world.

On Feb. 7, the United States Environmental Protection Agency (EPA) announced it will review the potential consequences of the partners’ proposed open-pit mine at Pebble on the Bristol Bay watershed, a worrying sign for proponents of the mine, given the companies have yet to even apply for mining permits.

Nevertheless, on Feb. 23, Northern Dynasty released its first update to the project’s preliminary economic assessment (PEA) since 2004, showing Pebble’s economics to be more robust than ever. The partners now plan to push ahead with a prefeasibility study for Pebble, expected in early 2012, and then begin the permitting process.

The PEA update, completed by Wardrop Engineering, outlines a base-case scenario of a 45-year mine life, which could be extended to 78 years or more. At a 0.3% copper-equivalent cutoff, Pebble’s current resource stands at 5.94 billion tonnes measured and indicated grading 0.78% copper-equivalent, containing 55 billion lbs. copper, 67 million oz. gold and 3.3 billion lbs. moly. It also has inferred resources totaling 4.84 billion tonnes of 0.53% copper-equivalent, containing 25.6 billion lbs. copper, 40 million oz. gold and 2.3 billion lbs. moly.

The mine plan in the PEA employs a conventional processing plant using crush-grind-float technology at a nominal throughput of 200,000 tonnes per day. Average annual production is estimated at a remarkable 678 million lbs. copper, 673,000 oz. gold and 32 million lbs. moly, at an average cash operating cost, after byproduct credits, of negative US11¢ per lb. copper (assuming prices of US$1,050 per oz. gold, US$15 per oz. silver, and US$13.50 per lb. moly). The 45-year average strip ratio was calculated to be 2.1-to-1, with grades averaging 0.46% copper, 0.4 gram gold per tonne and 214 parts per million moly. Metallurgical recoveries are expected to average 87.9% for copper, 71.3% for gold and 87.9% for moly. Importantly, the 45-year case considers only 32% of the total Pebble resource.

The project comes with a hefty price tag, however, at US$4.69 billion. The large initial capital cost also excludes certain expenses associated with a 378-megawatt natural-gas-fired turbine plant at the mine site, an 138-km transportation corridor to Cook Inlet for road and pipeline rights-of-way, and a new deepwater port on Cook Inlet, all of which the companies expect to find partners to help share the costs of construction.

Copper-gold concentrate produced at Pebble would be transported by a slurry pipeline to the new Cook Inlet port, while gold doré would be flown to market from an existing airport at Iliamna. Molybdenum concentrate would be bagged and trucked to the port for shipment.

The partners say the almost US$5-billion capital injection into the Alaskan economy will create some 2,000 jobs over the four years of mine construction, after which the mine’s labour force will drop to around 1,120. Among other things, the company says the mine will result in: significant annual payments to state and local governments; benefits for local communities as a result of supply and service contracts; and new social and economic infrastructure for southwest Alaska.

Dahlman Rose analyst Adam Graf praised the updated PEA news as Northern Dynasty’s “first step into a larger world.” He has a buy recommendation on the stock with a price target of $51.07 per share, arguing it is a solid takeover target. Raymond James analyst Tom Meyer likewise commended Northern Dynasty’s progress, calling Pebble a “mega project with optionality.” He has a strong buy recommendation and a six- to 12-month price target of $25 per share.

Not everyone is a Pebble convert, however. Earlier this year, special interest groups ranging from local native communities to a coalition of 360 hunting and fishing associations asked federal environmental officials to protect Bristol Bay from development, leading the EPA to recently announce it will undertake a comprehensive study of the proposed mine’s effects on local streams, rivers and wetlands. 

Environmental activists, such as Trout Unlimited president Chris Wood, say Bristol Bay is an “international hunting and fishing Mecca” with more than 100,000 sq. km of wetlands and nine major rivers. It is also home to one of the world’s largest sockeye salmon runs. (In 2008, the run was estimated at about 42 million fish.)

Wood says that between commercial fishing and tourism-related industries, the salmon run generates roughly US$450 million a year in revenues and sustains roughly 12,000 jobs. He notes around 65,000 people visit the remote region each year to fish, hunt and view wildlife.

Of the environmentalists’ many concerns, the biggest is toxic waste. They claim up to 10 billion tonnes of perpetually toxic waste could be dumped into the heart of the Bristol Bay water system over the life of the mine, in an area known for frequent earthquakes.

“Storing toxic waste behind earth and dams in a very active seismic area is not a risk we are willing to accept,” says Jim Klug, chairman of the American Fly Fishing Trade Association.

For its part, Northern Dynasty says “extensive baseline studies have been undertaken to characterize the physical, chemical, biological and social environment of the project area. These studies have resulted in a superior database, which – in characterizing the climate, surface and groundwater hydrology, wetlands, terrestrial wildlife habitat, fish and aquatic habitat, and marine habitat – has guided all aspects of project planning.”

The company plans to publicly release the environmental baseline study in early 2011.

As a Hunter Dickinson Group company, Northern Dynasty’s management is all too familiar with how difficult the permitting process can be when fish are involved. In November 2010, the Canadian federal government axed a mine proposal of a different Hunter Dickinson company, Taseko Mines (TKO-T, TGB-N), mainly over the destruction of one tiny but important lake. Taseko had received provincial approval to build its Prosperity copper mine near Williams Lake, B.C., but the federal government overruled the decision, arguing the fish-filled lake was regarded as a sacred place by local First Nation communities, who have ardently opposed for almost two decades now the lake’s draining and conversion into a tailings dump.

The Hunter Dickinson Group optioned the Pebble project from Teck Cominco (now Teck Resources [TCK.B-T, TCK-N]) in 2001 for $10 million. Later that year, it flipped the option to Northern Dynasty in exchange for a 20% carried interest in the project, which was exchanged for 14 million shares in 2006 (those shares are now worth $244 million given Northern Dynasty’s current share price).

In 2007, Anglo American optioned a 50% interest in Pebble after agreeing to spend about US$1.5 billion to advance the project. It has spent roughly US$325 million to date.