Northern Dynasty Minerals


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Northern Dynasty Minerals

Initiation of coverage Metals & mining

World-class low-cost copper-gold project

10 July 2013

Northern Dynasty Minerals’ Pebble project (50% owned) in south-west Alaska is the largest undeveloped copper and gold property globally. Due to high by-product credits, Pebble is projected to have a negative cash cost for copper. The preliminary assessment was released in February

Price

2011 and the company projects Pebble will receive its environmental permits in late-2017 and commence production in late-2021. We believe the key to Pebble’s success is securing environmental permits. Pebble is one of the most exciting mining projects globally in terms of scale, with an internal rate of return to NDM equity investors, at the current share price, of 15.9% based on the 45 year case. Assuming the project is executed to plan, our valuation for Northern Dynasty is US$5.78/share based on a dividend discount model. It also represents a cheap way of buying resources at a multiple of just 0.6c per pound of in-situ copper.

Net cash (C$m) at 31 March 2013

Year end

Revenue (C$m)

PBT* (C$m)

EPS* (C$)

DPS (C$)

P/E (x)

Yield (%)

12/11

0.0

(6.0)

(0.06)

0.00

N/A

N/A

12/12

0.0

(10.4)

(0.11)

0.00

N/A

N/A

12/13e

0.0

(6.7)

(0.07)

0.00

N/A

N/A

12/14e

0.0

(6.8)

(0.07)

0.00

N/A

N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Sensitivities: Permitting and execution key Exploration and development-stage mining companies have permitting, geologic, execution, capital-raising and commodity price risks. Due to its size, scale and location, there is some opposition to permitting the Pebble project, but there is also meaningful local support due to the potentially favourable economic impact of the project. There is a risk the geology is more challenging than the engineering studies predict, and there is the possibility management may have difficulty raising capital.

Financing The preliminary assessment (PA) estimates Pebble capex at US$6bn and we estimate it will require US$300m for permitting. We assume third parties provide US$1.3bn for infrastructure and the Partners sign a US$1.4bn gold-streaming agreement. We assume it raises the remaining US$3.3bn 60-40 debt equity, leaving US$620m in equity to be split equally between the partners after Anglo applies its remaining US$700m in earn-in capital to the equity requirement.

C$2.20

Market cap

C$209m CAD1.0568/USD

Shares in issue

95.0m

Free float

31%

Code

NDM, NAK

Primary exchange

TSE

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

(15.1)

(24.7)

(25.2)

Rel (local)

(14.5)

(23.5)

(29.2)

52-week high/low

In calculating a dividend discount valuation, we use a 10% discount rate, a 45-year mine life and long-term price assumptions of US$2.96/lb for copper, US$1,676/oz

C$4.91

C$2.01

Business description Northern Dynasty Minerals owns 50% of the Pebble copper, gold and molybdenum property in Alaska, the largest undeveloped property of its kind in the world.

Next events Permitting application

Q413

Pre-feasibility study

Q214

Analysts Wayne Atwell

Valuation: C$5.78 per share

25.7

Charles Gibson

+1 646 653 7026 +44 (0)20 3077 5724

[email protected] Edison profile page

for gold and US$12/lb for molybdenum. We assume the financial steps as outlined above, on which basis the dividend discount model values Northern Dynasty at US$5.78/share. Alternatively, were it to be valued at the average global rating of insitu copper resources, the value of its 50% interest in Pebble would be US$1.32bn or US$12.91 per share (based on a 0.3% copper equivalent cut-off grade).

Northern Dynasty Minerals is a research client of Edison Investment Research Limited

Investment summary Company description: World-class copper-gold property Northern Dynasty is an exploration and development company with a 50% interest in the Pebble Limited Parrtnership (PLP) project in south-west Alaska, one of the largest identified mineral deposits in the world. Anglo American is maintaining its 50% interest in the project by investing US$1.5bn. The partnership is currently working toward permitting, pre-feasibility and engineering studies that will allow it to bring Pebble into production. In February 2011, Wardrop completed an independent 43-101 compliant PA Technical Report on the project, which projects Pebble will secure its environmental permit in late-2017, complete construction in four years and commence production in late-2021. Pebble is encountering some opposition to its development effort. We believe the key to management successfully achieving its business objectives is securing its environmental permits in a timely manner. However, shareholders could benefit from an industry consolidation trend.

Valuation: Appears undervalued based on resources and dividend discount model In calculating its dividend discount value, we use a 10% discount rate, a 45-year mine life and longterm price assumptions of US$2.96/lb for copper, US$1,676/oz for gold and US$12/lb for molybdenum. Owing to high by-product credits, the property is projected to have a negative cash cost for copper. Assuming that it is executed according to plan, our valuation for NDM is US$5.78 per share based on a dividend discount model. In addition, there is the possibility that a major mining company could acquire Northern Dynasty for its interest in Pebble. Alternatively, Edison has calculated global average values for in-situ copper resources of US$0.40 for measured resources, US$0.02 for indicated resources and US$0.004 for inferred resources. Based on a 0.3% copper equivalent cut-off grade and valued at global average ratings, Northern Dynasty’s 50% interest in the Pebble property is worth US$1.32bn or US$12.91 per share.

Financials: Strong balance sheet, Anglo funding Northern Dynasty has a strong balance sheet with C$25.7m cash as of 31 March 2013 and no debt. The PA estimates Pebble’s capital cost at US$6.0bn, plus we estimate US$300m for permitting and assume third parties provide US$1.3bn to build infrastructure. Factoring in US$300m provided by Anglo, the net capital cost would be US$4.7bn. We assume the partners raise US$1.4bn through a gold-streaming agreement, which leaves US$3.3bn in net capital requirement. We assume the remaining capital is split 60-40 debt-equity. Anglo American has committed to invest US$1.5bn in the project and, as of 31 December 2012, had US$1.0bn that remains to be spent. We assume Anglo funds the US$300m required to secure permitting, which leaves US$700m available. We assume Anglo funds US$700m of the US$1.32bn equity requirement, leaving US$620m in equity requirement to be split US$310m each.

Sensitivities: Permitting is key The important issues are permitting, geology, commodity pricing, access to capital and project execution. The company assumes that PLP applies for its environmental permit late-2013 and obtains it by late-2017. Northern Dynasty’s success in obtaining an environmental permit is likely to affect its shares’ value. Due to its size, scale and location, there is some opposition to permitting Pebble, but there is also meaningful local support due to its potentially favourable economic impact on south-west Alaska. There is a risk the geology is more challenging than the engineering studies predict. Commodity pricing will also affect results. We believe Northern Dynasty will need to raise

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approximately US$310m in equity in the out years, which could be an issue if the equity market is not accommodating. There is risk that the project could be completed late or run over budget.

World-class property; robust economic model Northern Dynasty is a mineral exploration and development company based in Vancouver, Canada, with interests in 600 square miles of mineral claims in south-west Alaska, US. Its 50% owned Pebble Project is expected to start out as an open-pit mine with the possibility of an underground block cave operation later in its life. Pebble is a world-class mineral deposit with a measured and indicated resource of 55bnlb of copper, 67Moz of gold and 3.3bnlb of molybdenum, and an inferred resource of 26bnlb of copper, 40Moz of gold and 2.36bnlb of molybdenum. Annual production is projected at 678Mlb of copper (307,000 metric tonnes), 654,100oz of gold, 32Mlb of molybdenum and 3Moz of silver. Using the PA and Edison’s long term (and off-take) pricing assumptions, its revenue breakdown is as follows: copper 60%, gold 23%, molybdenum 11%, rhenium 2.7% and silver 2.3%. Management’s goal is to advance the project into commercial production but it could be of strategic interest to a major mining company.

Project overview Cominco American (now Teck Resources) began reconnaissance exploration in the Pebble region in the mid-1980s, leading to the discovery of the Sill Prospect and the Pebble discovery outcrop. Northern Dynasty and Hunter Dickinson secured an agreement to acquire the Pebble project from Cominco American in 2001. Northern Dynasty completed payment and the work required to acquire a 100% interest in the project in 2006 subject only to a net-profits interest held by Teck Resources on the Exploration Lands. Teck Resources retained a 4% pre-payback net-profit interest and a 5% after-payback net profit interest on any mine development within the Exploration Land portion of the Pebble property. The royalty will cover approximately 73% of production in the 45 year case. In July 2007, Northern Dynasty entered into a 50-50 partnership with Anglo American to develop a long-life mine at Pebble, which called for Anglo to elect to commit US$1.5bn in staged investments to retain its 50% interest in Pebble in an all or nothing arrangement. The Pebble deposit is one of the largest copper-gold porphyry systems ever discovered. The US Geological Survey lists the Pebble resource as the world’s most extensive mineralised system. We believe this could be a 100year plus project. The near-surface mineral resource within the western portion of the Pebble deposit is expected to be developed by the open-pit mining method. Underground mining, most specifically the block cave method, remains an economically viable option for developing the deeper and higher-grade resources in the eastern portion of the deposit, but it is likely to start out as an open-pit operation. The three development cases in the PA all employ open-pit mining.

Seismic risk Seismic risks are a factor in every mine design, but due to the level of seismic activity in Alaska there has been increased focus on factoring in seismic risks in the mine design. Extensive research has been conducted into historical seismic events in Alaska in general and south-west Alaska in particular to understand the probability and likely magnitude of seismic events that might affect Pebble. PLP assessed the impacts of both a 7.5 Richter magnitude earthquake on the Lake Clark Fault, located several miles from the project site, and a mega-thrust 9.2 Richter magnitude earthquake at the juncture of the Pacific and North American plates, located 100 miles or more to the east. Although the magnitude of the mega-thrust is greater, much of the energy is attenuated due to the distance to the project, with the result that the potential Lake Clark Fault earthquake effects would be greater. There is no evidence of movement along the Lake Clark Fault since the

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last glaciers receded roughly 10,000 years ago. Sections of the Lake Clark Fault nearest the Pebble project are actually splays off the main fault, and thus unlikely to release the same energy as the main fault.

Local opposition to Pebble There is local support for the development of the Pebble project, but there is also some opposition. Nineteen Alaskan tribes, native corps and borough governments passed resolutions supporting the partnership’s effort to develop the project in an environmentally safe and socially responsible manner. The Bristol Bay Native Corporation currently opposes the project. Several tribes opposed development of the Pebble project some years ago and requested that the EPA review and preemptively reject the Pebble project. The EPA initiated the Bristol Bay Watershed Assessment in February 2011 to assess the effects of future development, including mining on the land and the people and resources of the 40,000 square miles of south-west Alaska. The EPA focused on the impact of a hypothetical Pebble project. The Pebble Partnership has not made an official application for an environmental permit, so there is no defined project to review. In May 2012, the EPA published the first draft of the report, which, according to Northern Dynasty’s management, included what appeared to be potentially erroneous conclusions about the negative impact of a hypothetical Pebble project, in over emphasising the degree of risk for the project. The report used antiquated technology and discussed over topping of a hypothetical tailings facility and its negative impact. There was material peer criticism of this report. In May 2013, the EPA issued an update to the 2012 report designed to address the criticism and was once again very critical of the hypothetical Pebble project and did not include mitigation. According to Northern Dynasty’s management, there again appeared to be material flaws in the second EPA mine plan and study as well.

National Economic Impact Study outlines project benefits On 30 May 2013, Northern Dynasty announced the release of the National Economic Impact Study by IHS Global Insight. This independent study commissioned by Pebble Limited Partnership studied the potential impact of the Pebble project on the economy of south-west Alaska. It concluded the project could deliver 4,725 direct and indirect construction jobs during the one- to five-year construction period and 2,890 jobs during the 29 years the project operated. It further projected Pebble could increase the Lake & Peninsula Borough tax base by 600% over the 2013 level. The project is expected to contribute up to US$1.4bn annually to the state of Alaska’s economy, equivalent to approximately 3.1% of its GDP. This could add 15,000 jobs nationally, US$2.75bn to the US GDP and increase US copper production by 20%. This would create a large number of jobs in the Bristol Bay area. In 2011, only 35% of the local working age population worked full time year round. The population decline in recent years in the Bristol Bay region is among the worst in the nation. In the PA, construction is expected to take four years and require a peak labour force of 2,080. The operations workforce is projected at 1,120 over the initial 25-year mine life.

Geography Pebble is located in south-west Alaska, which is characterised by tundra, gently rolling hills and the absence of permafrost (see Exhibit 1). Several periods of glaciation have rounded the topography and filled the valley bottoms with glacial debris, marine and lake bottom sediment. The surface elevation over the deposit ranges from 800 to 1,200 feet.

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Exhibit 1: Pebble project access corridor

Source: Wardrop

Access and infrastructure Access to the Pebble project is currently achieved via air travel from Anchorage to the village of Iliamna. The property lies approximately 200 miles south-west of Anchorage, approximately 60 miles west of Tidewater on Cook Inlet and 17 miles north-west of Iliamna, and is accessed via helicopter. The Pebble project area is isolated and sparsely populated. It lies almost completely within the Lake and Peninsula Borough, which has a population of about 1,630 people in 18 communities. The nearest communities are 17-19 miles away. Pebble is on state land designated for mining and development and has undergone 10 years and US$150m in environmental and socio-economic studies.

Geology South-west Alaska is composed of an assemblage of north-east trending tectonostratigraphic terrains, which amalgamated southward in response to long-lived, north-east to north-west subduction, beginning in the Late Paleozoic. The Pebble district is located within the Kahiltna terrain, just north-west of its contact with the peninsular terrain to the south-east. This part of the Kahiltna is dominated by later Jurassic to Early Cretaceous basinal turbidites, which were deposited in a narrow basin aligned with the subduction suture zone against the continental side of the Wrangellia volcanic arc terrain. Mineralisation at Pebble is hosted by the Jura-Cretaceous rocks. The district was subjected to extensive erosion, and sedimentary and volcanic strata were deposited somewhere between 89

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and 65 Ma (see Exhibit 2). Eocene volcanic rocks overlie the older units. Low-lying parts of the district are covered by thin fluvio-glacial sediments. Exhibit 2: District geology of the Pebble project

Source: PA conducted by Wardrop

Mineralisation in Pebble East and Pebble West zones precipitated during formation of early k-silicate alteration. Additional gold-copper mineralisation precipitated in the eastern part of Pebble East during a structurally controlled overprint by advanced argillic alteration. Mineralisation is dominated by hypogene pyrite, chalcopyrite and molybdenite. Pebble East remains open to the east, north and south (see Exhibit 3). A much larger zone of strong alteration and low-grade mineralisation extends north, south and west of the known Pebble deposit. Exhibit 3: Plan view of relative mineralisation concentration of the Pebble deposit

Source: PA conducted by Wardrop. Note: Grade calculated at copper equivalent.

Mineralisation in the Pebble West zone is mostly hypogene, but also includes minor oxide and supergene zones. The leached zone forms a cap at the top of the Pebble West zone and is generally less than 100 feet thick. Most copper has been leached, whereas gold remains essentially intact. This zone immediately overlies a supergene zone, which can be several hundred feet thick and contains variable amounts of chalcocite, covellite and relict hypogene chalcopyrite. Mineralisation in Pebble East zone is entirely hypogene, without evidence of paleo-supergene

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effects below the unconformity with the cover sequence. There is no supergene mineralisation in Pebble East below the Tertiary unconformity nor in the non-mineralised overlying rocks.

Mineral resource estimation and history The current Pebble mineral resource estimate includes seven years of geological and geostatistical analysis and is based on drill data to September 2009. The principal economic metals included in the resource are copper, gold and molybdenum. The latest mineral resources are reported within a defined volume at various cut-off grades (Exhibit 4).

Exhibit 4: Current Pebble project resources (February 2010) Cut-off (% CuE)

Cu (bnlb)

Au (Moz)

Mo (bnlb)

CuE (bnlb)

178 180 203 301

3.8 3.8 2.4 0.4

5.9 5.9 3.7 0.5

0.21 0.2 0.12 0.02

7.6 7.4 4.7 0.7

0.35 0.36 0.41 0.51

257 268 301 342

51.3 49.6 41.9 24.1

60.9 56.6 44.7 23.3

3.07 2.89 2.25 1.07

95.5 91.7 74.8 40.7

0.42 0.45 0.55 0.76

0.35 0.36 0.41 0.52

250 260 293 341

55 53.6 44.5 24.3

66.9 62.5 48.3 24.2

3.28 3.09 2.37 1.09

102.2 98.8 79.2 41.2

0.24 0.32 0.48 0.69

0.26 0.3 0.37 0.45

215 259 289 379

25.6 20.1 14 5.4

40.4 27.4 15.7 5.1

2.29 1.62 0.84 0.29

56.5 41.4 25.9 9.3

CuE (%)

Mt

Cu (%)

0.65 0.66 0.77 1.16

527 508 277 27

0.33 0.34 0.4 0.62

0.35 0.36 0.42 0.62

0.8 0.85 1 1.3

5,414 4,891 3,391 1,422

0.43 0.46 0.56 0.77

0.78 0.83 0.98 1.29

5,942 5,399 3,668 1,449

0.53 0.66 0.89 1.2

4,835 2,845 1,322 353

Measured 0.3 0.4 0.6 1.0 Indicated 0.3 0.4 0.6 1.0 Measure + Indicated 0.3 0.4 0.6 1.0 Inferred 0.3 0.4 0.6 1.0

Au (g/t) Mo (ppm)

Source: PA conducted by Wardrop

Secondary metals of potential economic impact include silver, rhenium and palladium.

Development, mining and processing We expect Pebble to complete its pre-feasibility study in the second quarter of 2014. Based on company guidance, we expect the project to secure its environmental permit by the fourth quarter of 2017 (see separate permitting section on page 10), begin construction shortly thereafter, complete construction and initiate commercial production in late-2021. We believe it will take 18 months to fully ramp up Pebble.

Infrastructure Due to its location, Pebble has some advantages in terms of infrastructure spending. The project will be able to use the state-run airport at Iliamna, which would cost tens of millions to replicate. The deposit is at approximately 1,000 feet, a relatively modest altitude. The selected port site has deep water immediately offshore, enabling load-out pier construction without the need for a long jetty. In addition, the port is ice free 11 months of the year, eliminating the need for long storage periods for concentrate and supplies. The infrastructure that must be built for Pebble will include a transportation corridor, port and power plant. The PA assumed that the US$1.3bn capital required to build the infrastructure will be provided by third parties. An 86-mile transportation corridor will be developed to link the Pebble mine to a new deep-water port on Cook Inlet (see Exhibit 5). The transportation corridor will be approximately 80% on private

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land owned by various Alaska Native Village Corporations, which have access agreements with the Pebble Partnership. The rest of the transportation corridor is on land owned by the State of Alaska. The transportation corridor will include a two-lane, all-weather permanent access road, the primary purpose of which will be to transport freight by conventional highway tractors and trailers. The PA contemplates that the transportation corridor will include four buried parallel pipelines, including a copper-gold slurry concentrate pipeline from the mine site to the port; a return water pipeline from the port to the mine; a natural gas pipeline from the port to the mine to power a gas-fired power plant at the mine site; and a diesel fuel pipeline from the port site to the mine.

Exhibit 5: Transportation corridor and port site 1 location

Source: PA conducted by Wardrop

A permanent deep-water port will be built at the entrance of Insiskin Bay on Cook Inlet to serve as a product load-out facility and to facilitate inbound fuel and supplies. The port will be designed to accommodate annual shipments of 1.1m tonnes of concentrate in 50,000-tonne Handymax vessels. The PA envisages the energy for the project will be met via a 378MW natural gas-fired turbine plant at the mine site and an 8MW natural gas-fired generation plant at the port. Meteorological data indicate potential for wind energy to supplement natural gas-fired generated power.

Production Based on the PA Pebble will initiate production as an open-pit mine. Open-pit mining plans have been prepared for each of the three Pebble project development cases: the 25-year IDC Case, the 45-year Reference Case and the 78-year Resource Case. The cross section for the starter pit, as well as those for each development case, is shown in Exhibit 6. The base case for Pebble in its PA and our model is for a 45-year mine life.

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Exhibit 6: Cross section showing open-pit phase sequence

Source: PA conducted by Wardrop

Mine schedules have been developed for the life-of-mine in each development case, setting out volumes of waste and ore mined, dilution, grades of contained metal and material hardness. The maximum processing rate has been limited to 275,000 short tons a day as determined by the SAG mill hydraulic limit. The annual production rate fluctuates over the mine life as the hardness of the ore varies, particularly as the amount of softer Pebble East ore increases to 229,000 short tons per day in both the 45-year and 78-year cases. The three cases in the PA are based on open-pit mining. However, underground mining of the eastern portion of the Pebble deposit is a viable development option. Capital costs for development and operation of the proposed Pebble East block cave mine are estimated at US$1.39bn, with estimated sustaining capital at US$3.124bn.

Milling The process is based on conventional grind-crush-float technology. The run-of-mine ore from the open pit will be crushed and conveyed to the concentrator. The ore will be ground to liberate the mineral value from the host rock, then separated by industry-standard flotation processes. A bulk copper/molybdenum sulphide concentrate will pass through the molybdenum separation circuit to produce molybdenum sulphide concentrate, which will be bagged and trucked to port facilities on Cook Inlet. The molybdenum separation generates a copper concentrate, which contains most of the recovered gold that will be pumped through a pipeline to the port site. The pyrite concentrate will report to a secondary gold recovery circuit, where gold doré and bagged carbon-bearing fines will be produced and shipped offsite. Recovered gravity gold will be sent to the copper concentrate. In summary, there will be three products from the mill: copper concentrate, molybdenum concentrate and gold doré. The PA assumes the Pebble Partnership will construct a molybdenum autoclave plant offshore to treat the molybdenum concentrate, which will realise enhanced value through improved rhenium and copper recovery.

Tailings Tailing storage options have been designed for approximately 1.8bn tons of tailings that would be generated in the 25-year mine plan. A tailings site, approximately three miles west of the open pit, has been selected. The impoundment site would be created by three embankments, with the north embankment initially constructed to a height of approximately 200 feet. This embankment would be raised each year, while the south and east embankments will be built later in the mine life. The ultimate height of the north embankment will be approximately 685 feet. Due to seismic activity in Alaska, there has been increased interest in understanding seismic risks in the mine development and tailings areas. The embankment design conforms to Alaska Dam Safety regulations. Extensive research has been conducted into historical seismic events in Alaska

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in general and south-west Alaska in particular to understand the probability and likely magnitude of seismic events that might affect Pebble. The most likely candidates for seismic activity are large fault systems located at a distance from the mine. If seismic events do occur on these structures their energy is likely to have dissipated significantly by the time they reach the Pebble area. The Pebble engineers are designing all elements of the tailings facility to exceed the Maximum Credible Earthquake that could be expected near the site. A seepage collection system will be installed downstream from the tailings pond. Two tailings streams will be produced from the process plant. Bulk tailings comprising approximately 85% of the process plant feed will be benign. These tailings will be pumped from the process plant to pipelines lying along the crest of the embankment and will be discharged via a series of spigots onto beaches along the faces of the embankments. The second stream of tailings consists of pyrite-rich flow from the cleaner scavenger tailings. These tailings will be pumped via a separate pipeline and discharged subaqueously into the centre of the tailings pond.

Waste rock The project will generate 2.4bn tons of non-acid-generating waste rock and 0.6bn tons of potentially acid-generating waste rock during its 25-year mine plan. The rock will be placed in two pit rim waste dumps, one wrapping around the east end of the open pit and the second along the south-west and south sides of the open pit. Non-acid-generating waste rock will be stored in the dumps to the south and east of the pit. As a result of its low potential to generate acid, this waste rock is considered suitable for construction of tailings embankments and other permanent facilities. The rock that could potentially generate acid will be put in a dump on the western side of the pit. This waste rock contains low-grade copper mineralisation and will be processed through the mill at the end of mining operations.

Permitting and National Economic Impact Study Permitting – expected late-2017 We believe the Pebble Partnership will apply to the Corps of Engineers for a 404 Wetlands Permit under the Clean Water Act during the fourth quarter of 2013. This will put the Pebble Partnership into the Federal National Environmental Policy Act (NEPA) permitting process. It will eventually apply for 60 plus categories of permits and will need permits from federal, state and local agencies. Alaska’s Department of Natural Resources’ large mine-permitting team will integrate their detailed review of the Pebble application with the NEPA process. Pebble is on State of Alaska land designated for mineral exploration and development. Permitting for water withdrawal, fish passage, wetland and cultural resources has been ongoing throughout the exploration phase at Pebble. Permitting for construction and mine operations is expected to take four years to complete and will involve 10 or more regulatory agencies. Project permitting will be initiated when the Pebble Partnership completes and submits a Project Description and the completed Environment Baseline Document. These documents will provide the basis for the preparation of an Environmental Impact Statement (EIS) by the lead federal agency and its consultants under NEPA. The Pebble EIS will be the focal point for project permitting. The Pebble project is being designed to accommodate the social sensitivities of establishing a large industrial facility in an isolated, sparsely populated region.

Key environmental issues The key environmental and social issues associated with development of the Pebble project are: 

water quantity and quality of surface and groundwater;

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wetlands, especially those designated as jurisdictional (versus nonjurisdictional);



aquatic habitats, especially salmon and trout;



air quality; and



marine environment, especially protected species and the consequences of construction and mine operation.

Comprehensive environmental and socio-economic baseline studies have been undertaken in the Pebble project area since 2004. Northern Dynasty/PLP have invested more than US$150m to date. The studies have been designed to: 

fully characterise the existing biophysical and socioeconomics environment;



support the environmental analysis required for effective input into project design;



provide a strong foundation for internal environmental and social impact assessment to support corporate decision making; and



provide the information required for stakeholder consultation and mine permitting in Alaska.

The Bristol Bay region of south-west Alaska presents a multifaceted and geographically variable stakeholder landscape, including borough and city governments, Alaska Native tribes, communities, landowners and special interests. There are 31 tribal entities within the region.

Community, First Nations and Native Village corporation matters Two Alaska Native village corporations – Iliamna Natives and Pedro Bay Corporation – hold surface rights and significant areas of land along the Pebble project transportation corridor. The Pebble Partnership has developed commercial relationships with these and other Alaska Native village corporations in the project area. The Pebble deposit and claim area is located on state land specifically designated for mineral exploration and development in the Bristol Bay Area Plan. A comprehensive community relations programme has been undertaken in support of the Pebble project. The goals of this programme are to provide progress updates on project-related activities, seek stakeholder input on priorities and give feedback on how they are being addressed, educate stakeholders about modern mining principles, maximise community benefits associated with the Pebble project and provide a two-way dialogue on development. The Pebble Partnership has committed significant funds to provide opportunities for local residents, improve the quality of life in the Bristol Bay communities, and made a commitment to maximise local employment at the Pebble project.

Management (see back page for detail) Northern Dynasty has a strong management team, which is enhanced by its relationship with Hunter Dickinson, as 11.4% of its stock is owned by insiders and directors of Hunter Dickinson. Hunter Dickinson has a very deep bench, with strengths in geology, engineering, community relations, project development, mine construction and permitting. Hunter Dickinson employs people who have permitted mines, built mines, built mills and completed financing. Founded in 1985, Hunter Dickinson has very deep relationships, which should help it raise capital.

Financials Strong balance sheet Northern Dynasty had cash and cash equivalents of C$25.7m as of 31 March 2013, 103m fully diluted shares outstanding and no debt. We do not expect it to fund additional Pebble project

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development expenditures until 2018, as Anglo had US$1.0bn of financing commitment unspent at the end of 2012. An affiliate of Rio Tinto owns 19.1% of Northern Dynasty shares. Anglo American is required to elect to continue funding its US$1.5bn investment in Pebble, in an all or nothing arrangement, to retain its 50% interest in the Pebble project under the terms of the Pebble Limited Partnership Agreement. A significant proportion of its earn-in contribution is expected to be applied to initial capital costs to construct the mine, which reduces Northern Dynasty’s capital requirement.

Project financing The PA estimates the capital cost for the Pebble project at US$6.0bn and we assume it will spend US$300m for permitting, raising the total cost to US$6.3bn. Anglo American had US$996m of its US$1.5bn capital commitment remaining as of 31 December 2012. We assume Anglo funds the US$300m permitting cost, reducing its remaining available funding to the project to US$700m. The PA assumes third parties provide US$1.3bn for the construction of infrastructure projects, reducing the net capital cost of the project to US$4.7bn. All three development cases presented in the PA have the same initial capital requirement of US$4.7bn (see Exhibit 7), plus US$300m for permitting. We believe the partnership will sign a US$1.4bn gold streaming deal, which would leave US$3.3bn to be raised. We assume the streaming deal would result in Pebble delivering 250,000oz of gold for US$435/oz. We assume the financing will be split 60-40 debt-equity, resulting in the need for US$1.32bn in equity. We assume Anglo’s remaining US$700m will be applied to the equity account, leaving US$620m to be split equally between the two partners.

Exhibit 7: Pebble project – initial capital (all cases) Item Mining Process Molybdenum separation Secondary gold plant Other infrastructure Tailings Pipelines Access road* Port infrastructure* Port process Power generation* Indirect costs Contingency Total capital cost estimate Molybdenum autoclave Escalation/de-escalation adjustments Less outsourced infrastructure* Initial capital (financial model)

Cost (US$m) 430.8 1,058.2 83.5 160.5 422.0 294.0 97.5 162.0 154.5 87.1 534.1 1,406.8 865.7 5,756.7 374.2 (121.1) (1,315.0) 4,694.8

Source: Wardrop PA. Note: The contingency estimate was applied to all estimated areas and further refined by applying a weighting factor to each contingency resulting in a capital cost contingency of 17.7%; * Outsourced infrastructure, including associated indirects and contingencies.

Project assumptions In Exhibit 8 we list the assumptions used in our economic model of the project based on the PA. We use these assumptions in calculating our dividend discount model. The 45-year Reference Case will process 3.8bn tons of ore, with a 2.1 to one strip ratio and average 0.46% copper, 0.011 ounces of gold per tonne and 214ppm molybdenum. Recoveries are projected at 87.9% for copper, 71.3% for gold and 87.9% for molybdenum.

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Exhibit 8: Assumptions used in Edison valuation Average (except where noted) 228,500 678 654 32 0.46 0.011 214 87.9 71.3 87.9 2.1 to 1 1.42 11.55

Daily average throughput (short tons) Annual copper production (Mlbs) Annual gold production (koz) Annual molybdenum production (Mlbs) Copper grade (%) Gold grade (oz/short ton) Molybdenum grade (ppm) Copper recovery (%) Gold recovery (%) Molybdenum recovery (%) Strip ratio Total cash cost/pound of copper (US$/lb) Total cash cost per tonne milled (US$/short ton) Source: Edison Investment Research, PA conducted by Wardrop

Valuation: High risk, high return There is a higher-than-normal degree of risk in the Northern Dynasty shares, as production is not expected for eight years and the capital cost is relatively high. However, there is a high potential return, due to the size of the project and its robust economic model. Our dividend discount model is based on a 10% discount rate, 45-year mine life and long-term price assumptions of US$2.96 per pound for copper US$1,676/oz for gold and US$12 per pound for molybdenum. We assume it will need to raise US$310m (C$328m) in additional equity based on the previous discussion. On this basis (and assuming that the project is executed according to plan), we value its equity at US$5.78 per share based on a 45-year mine life. Exhibit 10 (overleaf) provides our estimate of its sensitivity to a range of copper, gold and molybdenum prices and different discount rates. Alternatively, Northern Dynasty can be looked at in terms of its in-situ copper resource. In this case, Edison has put together a peer comparison list of 22 copper exploration and development companies worldwide. Our valuation is based on the average value for its peer group. The value for copper pounds is US$0.40 for its measured resource, US$0.02 for its indicated resource and US$0.004 for its inferred resource. At these global average ratings, NDM’s 50% interest in the Pebble property is worth US$1.32bn or US$12.91per share (based on a 0.3% copper equivalent cut-off grade). We list the value of its equity based on three cut-off grades in Exhibit 9.

Exhibit 9: Implied value of in-situ resource at global average ratings Category

Value per insitu lb (US$)

Cut-off grade (%) Measured Indicated Inferred Value (US$m) Value/share (US$)

0.400 0.020 0.004

Resource at cut-off grade (billion pounds of copper) 0.30% 3.8 51.3 25.6

0.40% 3.8 49.6 20.1

Value of resource (US$m) 0.60% 2.4 41.9 14.0

0.30% 1,520 1,026 102 2,648 12.91

0.40% 1,520 992 80 2,592 12.63

0.60% 960 838 56 1,854 9.03

Source: Edison Investment Research

Sensitivities Exploration and development-stage mining companies have environmental permitting, geologic, execution, capital-raising and commodity price risks. Due to the size, scale and location of the Pebble project, there is opposition to permitting, although there is also meaningful local support due

Northern Dynasty Minerals | 10 July 2013

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to the potentially favourable impact of the project. On 30 May, IHS Global Insight released a study outlining the very favourable impact Pebble could have on the Alaskan and US economies. There is a risk the Pebble project geology is more challenging than the engineering studies predict, or that the grades are below those listed in the resource estimate. The partnership has over one million feet of core at Pebble and we believe management has a good understanding of the geology. A large project like Pebble could have cost overruns, be completed late or ramp up slowly. Management could have difficulty raising capital for the project during a period of economic weakness. Weakness in the global economy could also put downward pressure on commodity prices resulting in an earnings shortfall (or vice-versa). In summary, this is a very large project with an attractive cost structure (based on the PA) and a diversified mix of commodities. Quantitative sensitivities are as follows:

Exhibit 10: Northern Dynasty project – NAV sensitivity (in US$/share) Discount rate NAV 6% NAV 8% NAV 10% NAV 12% NAV 14% NAV 15.9% Cu price (Au US$1,676/oz, Mo US$12/lb) US$1.82/lb US$2.45/lb US$2.70/lb US$2.96/lb US$3.20/lb US$3.45/lb Au price (Cu US$2.96/lb, Mo US$12/lb) US$1,275/oz US$1,475 US$1,676 US$1,875 US$2,075 Mo price (Au US$1,676/oz, Cu US$2.96/lb) US$8/lb US$10 US$12/lb US$14/lb US$16/lb

Reference case – 45 years 14.67 9.00 5.78 3.85 2.64 2.20 2.20 4.16 4.95 5.78 6.54 7.34 5.64 5.71 5.78 5.85 5.92 5.18 5.48 5.78 6.08 6.38

Source: Edison Investment Research

Blue-sky exploration upside Attractive exploration targets: Exploration drilling has identified numerous zones of copper, gold, molybdenum and silver mineralisation on the property outside the Pebble deposit. Adjacent to the Pebble deposit and east of the ZG1 fault is the high-grade intersection in drill hole 6348, one of the best drill holes on the property. The intersection in drilling hole 6348 was 949 feet of 1.92% CuE, which is not included in the resource. The area east of this intersection remains open, which represents a meaningful opportunity to expand the highest-grade portion of the Pebble deposit at depth and to the east. Opportunities: The Pebble deposit is very large and the 78-year resource case would exploit only 55% of the total resource. The scale of the deposit offers opportunities to optimise the project over its life and change the mine plan in response to short-term changes in market conditions. We believe the project could have a 100-year plus life.

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Exhibit 11: Financial summary Year end December

C$'000s

PROFIT & LOSS Revenue Cost of Sales Gross Profit EBITDA Operating Profit (before amort. and except.) Intangible Amortisation Exceptionals Other Operating Profit Net Interest Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax Profit After Tax (norm) Profit After Tax (FRS 3)

2011 IFRS

2012 IFRS

2013e IFRS

2014e IFRS

2015e IFRS

2016e IFRS

0 0 0 (6,987) (6,987) 0 0 (14,147) (21,134) 944 (6,043) (20,190) 51 (5,985) (20,139)

0 0 0 (11,241) (11,241) 0 0 (5,308) (16,549) 887 (10,354) (15,662) 0 (10,437) (15,662)

0 0 0 (7,122) (7,122) 0 0 (5,225) (12,347) 413 (6,709) (11,934) 0 (6,709) (11,934)

0 0 0 (7,122) (7,122) 0 0 (5,225) (12,347) 312 (6,810) (12,035) 0 (6,810) (12,035)

0 0 0 (7,122) (7,122) 0 0 (5,225) (12,347) 210 (6,912) (12,137) 0 (6,912) (12,137)

0 0 0 (7,122) (7,122) 0 0 (5,225) (12,347) 107 (7,015) (12,240) 0 (7,015) (12,240)

Average Number of Shares Outstanding (m) EPS - normalised (C$) EPS - normalised and fully diluted (C$) EPS - (IFRS) (C$) Dividend per share (C$)

94.9 (0.06) (0.06) (0.02) 0.0

95.0 (0.11) (0.10) (0.02) 0.0

95.0 (0.07) (0.07) (0.01) 0.0

95.0 (0.07) (0.07) (0.01) 0.0

95.0 (0.07) (0.07) (0.01) 0.0

95.0 (0.07) (0.07) (0.01) 0.0

N/A N/A N/A

N/A N/A N/A

N/A N/A N/A

N/A N/A N/A

N/A N/A N/A

N/A N/A N/A

BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Investments Current Assets Stocks Debtors Cash Other Current Liabilities Creditors Short term borrowings Long Term Liabilities Long term borrowings Offtake financing Other long term liabilities Net Assets

102,597 0 1,055 101,542 42,644 0 5,187 37,457 0 (170) (170) 0 (3,715) 0 0 (3,715) 141,356

100,391 0 1,055 99,336 32,543 0 5,006 27,537 0 (409) (409) 0 (3,632) 0 0 (3,632) 128,893

100,391 0 1,055 99,336 25,834 0 5,006 20,828 0 (409) (409) 0 (3,632) 0 0 (3,632) 122,184

100,391 0 1,055 99,336 19,024 0 5,006 14,018 0 (409) (409) 0 (3,632) 0 0 (3,632) 115,374

100,391 0 1,055 99,336 12,113 0 5,006 7,107 0 (409) (409) 0 (3,632) 0 0 (3,632) 108,463

100,391 0 1,055 99,336 5,097 0 5,006 91 0 (409) (409) 0 (3,632) 0 0 (3,632) 101,447

CASH FLOW Operating Cash Flow Net Interest Tax Capex Acquisitions/disposals Equity Financing Offtake financing Dividends Net Cash Flow Opening net debt/(cash) HP finance leases initiated Other Closing net debt/(cash)

(7,485) 610 0 0 0 4,211 0 0 (2,664) (40,121) 0 0 (37,457)

(10,464) 445 0 0 0 97 0 0 (9,922) (37,457) 0 0 (27,535)

(7,122) 413 0 0 0 0 0 0 (6,709) (27,537) 0 0 (20,828)

(7,122) 312 0 0 0 0 0 0 (6,810) (20,828) 0 0 (14,018)

(7,122) 210 0 0 0 0 0 0 (6,912) (14,018) 0 0 (7,107)

(7,122) 107 0 0 0 0 0 0 (7,015) (7,107) 0 0 (91)

Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%)

Source: Company data, Edison Investment Research

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Contact details

Revenue by geography

15th Floor, 1040 West Georgia Street, Vancouver, BC. Canada.

N/A

+1 (604) 684 8092 www.northerndynastyminerals.com CAGR metrics

Profitability metrics

EPS 2010-14e EPS 2012-14e EBITDA 2010-14e EBITDA 2012-14e Sales 2010-14e Sales 2012-14e

N/A N/A N/A N/A N/A N/A

Balance sheet metrics

ROCE 13e Avg ROCE 2010-14e ROE 13e Gross margin 13e Operating margin 13e Gr mgn / Op mgn 13e

N/A N/A N/A N/A N/A N/A

Gearing 13e Interest cover 13e CA/CL 13e Stock days 13e Debtor days 13e Creditor days 13e

Sensitivities evaluation N/A N/A N/A N/A N/A N/A

Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices

     

Management team Executive Chairman: Robert Dickinson

President and CEO: Ron Thiessen

Mr Dickinson is an economic geologist with more than 40 years of mines experience. He leads Northern Dynasty’s project development effort and is chairman of Hunter Dickinson, which he co-founded in 1985.

Mr Thiessen is an accredited public accountant with more than 25 years’ corporate development experience. He leads Northern Dynasty’s corporate development and financing activities and is CEO of Hunter Dickinson, where he has been a director since 1994.

Principal shareholders

(%)

Rio Tinto Hunter Dickinson insiders Mackenzie Financial Corporation Jennison Associates LLC Bristol Investment Partners LLC Wellington Management Company, LLP Prudential Jennison Natural Resources Fd UBS AG

19.00 11.40 7.06 2.60 2.39 2.33 1.95 1.39

Companies named in this report Anglo American AAL.LSE, Rio Tinto RIO:LSE.

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