Anglo American kicks aside Pebble

VANCOUVER — The massive and controversial Pebble copper-gold project in Alaska is solely owned again by junior Northern Dynasty Minerals (TSX: NDM; NYSE-MKT: NAK), now that its joint-venture partner Anglo American (LSE: AAL; US-OTC: AAUKY), which poured $540 million into the project over six years, has decided to walk away empty-handed.

Like most majors, Anglo has been reassessing its spending to focus on projects offering lower risk and higher returns. Pebble did not make the cut.

“Despite our belief that Pebble is a deposit of rare magnitude and quality, we have taken the decision to withdraw following a thorough assessment of Anglo American’s extensive pipeline of long-dated project options,” said Anglo CEO Mark Cutifani. “Our focus has been to prioritize capital to projects with the highest value and lowest risks within our portfolio, and reduce the capital required to sustain such projects during the pre-approval phases of development as part of a more effective, value-driven capital allocation model.”

In 2007 Anglo signed a deal with Northern Dynasty to earn a 50% stake in Pebble by funding US$1.5 billion of work. Anglo has spent more than a third of that commitment, but the structure of their deal means that by halting work now, the major gets nothing.

To account for the loss, Anglo will record a US$300-million impairment charge at year-end. It will also cut a cheque to Northern Dynasty related to expenses and contracts at Pebble. The size of that payment will be the subject of negotiation over the next few weeks, though Northern Dynasty CEO Ron Thiessen says the payment will “not be material to Anglo.”

Anglo’s departure from the partnership starts a new chapter in the three-decade-old Pebble story.

“Northern Dynasty has 100% of this project back, and that is a significant thing,” Thiessen said in a conference call. “Some of the parties that were less than enthusiastic about us not being in control of the project over the last few years will come back and take another look — plus look at the database that Anglo is leaving behind. So I think there’s an interesting and positive dynamic going forward from this.”

The database Thiessen mentions is the product of Anglo’s half-billion dollar investment in Pebble, which advanced the project almost to the permitting stage. In Thiessen’s words, all of the “heavy lifting has been done” on the engineering front, creating a body of work he believes will not go unappreciated in the market.

“If I can take you back in time: the whole point of bringing Anglo on in 2007 was to access an adequate amount of capital to allow us to do the engineering to get to a prefeasibility level of detail, which would permit another mining company to — if you will — take out Northern Dynasty,” Thiessen said. Now that Anglo has advanced Pebble to that stage and walked away, leaving the project with just one owner, Thiessen thinks Pebble might attract “a renewed sense of interest.”

Northern Dynasty will certainly need an interested partner. The Vancouver-based company is tiny relative to the costs of bringing Pebble to production: its market capitalization is $146 million, while a 2011 preliminary economic assessment for Pebble pegged development costs at US$4.7 billion.

Finding that partner will take some time. For now, Thiessen says Northern Dynasty will negotiate the details of Anglo’s departure and develop a fresh budget for the project going forward. To develop that budget the company will have to decide whether to finalize and submit the project description to regulators, a move that initiates the formal permitting process. Anglo’s investment advanced the project description to 95% completion.

“Should we start permitting this year as is the plan?” Thiessen asked. “In the first six months, costs are going to be negligible, but after that you’ve got a fair bit of engagement with regulators, so it could cost anywhere from $20 million to $45 million a year. For Northern Dynasty, those are pretty large numbers.”

In short, Northern Dynasty hasn’t yet decided on a new Pebble plan, largely because the company was not given advance notice of Anglo’s decision. The company will announce plans as they are developed.

During the conference call Thiessen was asked repeatedly about what kind of partnership structure Northern Dynasty wants at Pebble. With news of Anglo’s departure less than 24 hours old, he had few specifics to give, but he could speak to some guiding principles.

“Our objective is that we want to retain the premium that comes with having the most valuable mineral deposit in North America, and to that extent we’re not going to sell for a pittance,” he said. “The amount of money that’s required to take the project through permitting is not a pittance, per se, but it is small relative to the value of the whole project. So if a major comes to the table I would say funding for the permitting process would represent a nominal amount of the value. At the end of the day, if they want control they would have to take out Northern Dynasty.”

Buying Northern Dynasty  would be less expensive today than it was prior to Anglo’s announcement. The junior’s  shares lost 35% on the news, falling to $1.52 from $2.33. Thiessen acknowledged the loss, noting that the “market capitalization of Northern Dynasty did reflect the value of the remaining expenditure requirement of Anglo.”

However, an optimist could look at Anglo’s departure from another perspective: Thiessen points out that Anglo’s expenditures at Pebble represent “$540-million worth of financing with zero dilution.”

Pebble is the largest undeveloped copper-gold project in the world by resource, with 5.9 billion measured and indicated tonnes containing 55 billion lb. copper, 67 million oz. gold and 3.3 billion lb. molybdenum. Inferred resources add 4.8 billion tonnes containing another 26 billion lb. copper, 40 million oz. gold and 2.3 billion lb. moly.

The project, 65 km from tidewater on the Cook Inlet in southern Alaska, has drawn deep criticism from environmentalists who posit the mine would contaminate the vital sockeye spawning grounds in the area.

In May 2012 the U.S. Environmental Protection Agency released its draft Bristol Bay Watershed Assessment, which outlined serious concerns over mine development. A subsequent panel of independent experts who reviewed the document, however, found it “inadequate, premature and misleading.”

Anglo’s share price was little changed on the news, falling 1.1%. Analyst Tony Robson of BMO Capital Markets wrote that the Pebble decision did not impact his outlook for the major because “BMO had ascribed no value to the project,” which he described as long-dated, capital intensive and subject to environmental opposition.