Northern Dynasty Minerals Ltd. - Exhibit 99.2 - Filed by newsfilecorp.com
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2017
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
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Table of Contents
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| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
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1.1 Date
This Management’s Discussion and Analysis ("MD&A") should
be read in conjunction with the unaudited condensed consolidated interim
financial statements (the "Interim Financial Statements") for the three and nine
months ended September 30, 2017 of Northern Dynasty Minerals Ltd. ("Northern
Dynasty" or the "Company") and the audited consolidated financial statements for
the year ended December 31, 2016 (the "Financial Statements") and the annual
MD&A for the same period, as publicly filed under the Company’s profile on
SEDAR at www.sedar.com.
The Company reports in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board
("IASB") and interpretations of the IFRS Interpretations Committee (together,
"IFRS"). The following disclosure and associated Interim Financial Statements
are presented in accordance with IFRS. This MD&A is prepared as of November
9, 2017. All dollar amounts herein are expressed in Canadian dollars, unless
otherwise specified.
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This MD&A contains certain forward-looking
information and forward-looking statements within the meaning of
applicable Canadian securities laws and forward-looking statements within
the meaning of the United States Private Securities Litigation Reform Act
of 1995. Forward-looking statements describe our future plans, strategies,
expectations and objectives, and are generally, but not always,
identifiable by use of the words "may", "will", "should", "continue",
"expect", "anticipate", "estimate", "believe", "intend", "plan" or
"project" or the negative of these words or other variations on these
words or comparable terminology. |
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Forward-looking statements contained or incorporated by
reference into this MD&A include, without limitation, statements
regarding: |
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our ability to proceed with applications for federal and
state permitting under the Clean Water Act and the National
Environmental Policy Act; |
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our expectations regarding the potential for securing the
necessary permitting of a mine at the Pebble Project; |
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the outcome of any legal proceedings in which we are
engaged; |
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our ability to raise capital for the exploration and
development activities; |
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our expected financial performance in future periods; |
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our plan of operations; and |
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factors relating to our investment decisions. |
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Forward-looking information is based on the reasonable
assumptions, estimates, analysis and opinions of management made in light
of its experience and its perception of trends, current conditions and
expected developments, as well as other factors that management believes
to be relevant and reasonable in the circumstances at the date that such
statements are made, but which may prove to be incorrect. We believe that
the assumptions and expectations reflected in such forward-looking
information are reasonable. |
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Key assumptions upon which the Company’s forward-looking
information are based include: |
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that we will be able to secure sufficient capital
necessary for continued environmental assessment and permitting activities
and engineering work which must be completed prior to any potential
development of the Pebble Project which would then require engineering and
financing in order to advance to ultimate construction; |
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that we will ultimately be able to demonstrate that a
mine at the Pebble Project can be developed and operated in an
environmentally sound and socially responsible manner, meeting all
relevant federal, state and local regulatory requirements so that we will
be ultimately able to obtain permits authorizing construction of a mine at
the Pebble Project; |
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that the market prices of copper, gold, molybdenum and
silver will not significantly decline or stay depressed for a lengthy
period of time; |
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| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
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that our key personnel will continue their
employment with us; and |
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that we
will continue to be able to secure minimal adequate financing on
acceptable terms. |
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Readers are cautioned that the foregoing list is not
exhaustive of all factors and assumptions that may have been used.
Forward-looking statements are also subject to risks and uncertainties
facing our business, any of which could have a material impact on our
outlook. |
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| Some of the risks we face and the uncertainties that
could cause actual results to differ materially from those expressed in
the forward-looking statements include: |
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an inability to ultimately obtain permitting for a mine
at the Pebble Project; |
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an inability to continue to fund exploration and
development activities and other operating costs; |
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the highly cyclical and speculative nature of the mineral
resource exploration business; |
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the pre-development stage economic viability and
technical uncertainties of the Pebble Project and the lack of known
reserves on the Pebble Project; |
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an inability to recover even the financial statement
carrying values of the Pebble Project if we cease to continue on a going
concern basis; |
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the potential for loss of the services of key executive
officers; |
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a history of, and expectation of further, financial
losses from operations impacting our ability to continue on a going
concern basis; |
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the volatility of copper, gold, molybdenum and silver
prices and mining share prices; |
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the inherent risk involved in the exploration,
development and production of minerals, and the presence of unknown
geological and other physical and environmental hazards at the Pebble
Project; |
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the potential for changes in, or the introduction of new,
government regulations relating to mining, including laws and regulations
relating to the protection of the environment and project legal titles; |
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potential claims by third parties to titles or rights
involving the Pebble Project; |
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the possible inability to insure our operations against
all risks; |
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uncertainty related to litigation; |
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the highly competitive nature of the mining business; |
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the potential equity dilution to current shareholders
from future equity financings; and |
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that we have never paid dividends and will not do so in
the foreseeable future. |
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While the effort was made to list the primary risk
factors, this list should not be considered exhaustive of the factors that
may affect any of our forward-looking statements or information.
Forward-looking statements or information are statements about the future
and are inherently uncertain, and actual achievements of the Company or
other future events or conditions may differ materially from those
reflected in the forward-looking statements or information due to a
variety of risks, uncertainties and other factors, including, without
limitation, the risks and uncertainties described above and otherwise
contained herein. |
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Our forward-looking statements and risk factors are based
on the reasonable beliefs, expectations and opinions of management on the
date of this MD&A. Although we have attempted to identify important
factors that could cause actual results to differ materially from those
contained in forward-looking information, there may be other factors that
cause results not to be as anticipated, estimated or intended. There is no
assurance that such information will prove to be accurate, as actual
results and future events could differ materially from those anticipated
in such information. Accordingly, readers should appreciate the inherent
uncertainty of, and not place undue reliance on forward-looking
information. We do not undertake to update any forward-looking
information, except as, and to the extent required by, applicable
securities laws. |
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| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
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For more information on the Company, investors should
review the Company’s annual information form and home jurisdiction filings
that are available on SEDAR at www.sedar.com. |
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The Company reviews its forward-looking statements on an
ongoing basis and updates this information when circumstances require it. |
| Cautionary Note to Investors
Concerning Estimates of Measured and Indicated Resources |
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The following section uses the terms "measured resources"
and "indicated resources". The Company advises investors that although
those terms are recognized and required by Canadian regulations, the SEC
does not recognize them. Investors are cautioned not to assume that all
or any part of mineral deposits in these categories will ever be
converted into reserves. |
| Cautionary Note to Investors
Concerning Estimates of Inferred Resources |
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The following section uses the term "inferred resources".
The Company advises investors that although this term is recognized and
required by Canadian regulations, the SEC does not recognize it. "Inferred
resources" have a great amount of uncertainty as to their existence, and
as to their economic and legal feasibility. It cannot be assumed that all
or any part of a mineral resource will ever be upgraded to a higher
category. Under Canadian rules, estimates of inferred mineral resources
may not form the basis of economic studies, except in rare cases.
Investors are cautioned not to assume that all or any part of an
inferred resource exists, or is economically or legally mineable.
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| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
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1.2 Overview
Northern Dynasty is a mineral exploration company which,
through subsidiaries, holds a 100% interest in mining claims that are part of or
in the vicinity of the Pebble Copper-Gold-Molybdenum-Silver Project (the "Pebble
Project" or "Pebble") in southwest Alaska, USA ("US"). The Company’s business in
Alaska is operated through the Pebble Limited Partnership (the "Pebble
Partnership"), a wholly-owned Alaskan registered limited partnership.
The Pebble Project is an initiative to develop one of the
world’s most important mineral resources. The current mineral resources, as
estimated at a 0.30% copper equivalent (CuEQ)1 cut-off grade
comprise:
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6.44 billion tonnes in the combined Measured and
Indicated categories 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 |
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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. |
Northern Dynasty’s near-term goals are to secure a project
partner(s) with the financial resources to substantially contribute to
permitting, building and operating a world-class mine at Pebble and to initiate
federal and state permitting in 2017.
Through the Pebble Partnership, the Company continues to
advance a comprehensive program of engineering and environmental studies, field
investigations and related technical studies directed toward finalizing a
development design and preparing documentation to initiate federal and state
permitting. To facilitate this work, the Pebble Partnership has recently
appointed two senior technical leaders.
Stephen Hodgson, P. Eng., has been appointed Senior Vice
President of Engineering and Project Director and will lead Pebble’s engineering
and project development team, with responsibility for all aspects of project
design, engineering and financial studies and regulatory compliance. Mr. Hodgson
is very familiar with the Pebble Project, having led engineering activities at
Pebble for Northern Dynasty since 2005 and also having been part of the team
that evaluated the project for Cominco in the early 1990’s.
Mr. Hodgson is supported by the Pebble Partnership’s new Vice
President of Permitting, James Fueg, PMP, CPG, who assumes responsibility for
all aspects of the project’s regulatory permitting team and process, including
management of environmental and socioeconomic studies, liaison with federal and
state agencies and active management of Pebble’s forthcoming Environmental
Impact Statement ("EIS") process under the
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1
Mineral resources at December 2014 as estimated by David Gaunt, PGeo., a
qualified person who is not independent of Northern Dynasty. The resource
estimate is constrained by a conceptual pit that was developed using a
Lerchs-Grossman algorithm. Copper equivalent (“CuEQ”) incorporates the
contribution of copper, gold and molybdenum. Although the estimate includes
silver, it was not used as part of the CuEQ in order to facilitate comparison
with previous estimates which did not consider the silver content or its
potential economic contribution. CuEQ uses metal prices of US$1.85/lb for
copper, US$902/oz for gold and US$12.50/lb for molybdenum, and recoveries of 85%
for copper 69.6% for gold, and 77.8% for molybdenum in the Pebble West zone and
89.3% for copper, 76.8% for gold, 83.7% for molybdenum in the Pebble East zone.
Contained metal calculations are based on 100% recoveries. A 0.30% CuEQ cut-off
is considered to be appropriate for porphyry deposit open pit mining operations
in the Americas. All mineral resource estimates, cut-offs and metallurgical
recoveries are subject to change as a consequence of more detailed economic
analyses that would be required in pre-feasibility and feasibility studies. For
additional details, see the Company’s 2016 Annual Information Form and 2014
Technical Report, both of which are filed at www.sedar.com.
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| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
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National Environmental Policy Act ("NEPA"). Mr. Fueg has more
than 20 years of project experience in Alaska, and was most recently the
Technical Services Manager for the Donlin Gold Project in western Alaska, where
he played a leadership role managing the EIS and NEPA permitting process for
that project, which is expected to receive a final Record of Decision in
2018.
During the quarter, the Pebble Partnership also initiated a
number of public presentations on current planning considerations for Pebble,
which will significantly reduce the project’s development footprint and enhance
environmental safeguards. These include:
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The development scenario currently being considered would
reduce the footprint of Pebble Project’s major mine facilities (pit,
tailings storage facility) to approximately 5.4 square miles; |
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Primary mine operations would be eliminated from the
Upper Talarik watershed region, minimizing the project’s environmental
footprint and addressing stakeholder concerns about salmon population and
productivity; |
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Tailing Storage Facilities ("TSF") would be constructed
with enhanced buttresses and slope, and a greater safety factor.
Potentially acid generating tailings would be separated from other
tailings and be stored in a lined TSF, and all TSF would be located in the
North Fork Koktuli drainage area; |
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Pebble would no longer require the use of waste rock
piles, significantly reducing potential risk associated with acid rock
drainage and potential related environmental impacts; |
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Pebble would not use cyanide in the recovery process.
Cyanide is safely used in Alaska and around the world to increase gold
recovery; however, in order to respond to stakeholder concerns, Pebble
would elect not to utilize the material for this particular project; |
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The development would include the creation of a new ferry
route across Iliamna Lake, minimizing the total road area, stream
crossings, bridges, and culverts for the Pebble Mine and, ultimately, the
project’s impact on local wetlands; and |
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The mine would be designed to withstand the greatest
possible seismicity predicted by science. |
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| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
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Corporate
As at September 30, 2017, the Company has $30.9 million in cash
and cash equivalents for its operating requirements and a further $6.7 million
in held-to maturity investments that will become available to the Company in
November of this year. The Company has prioritized the allocation of available
financial resources in order to meet key corporate and Pebble Project
expenditure requirements in the near term and have available financial resources
to carry forward into the first quarter of 2018. Although the Company will seek
financing as necessary to advance its programs, there can be no assurances that
it will be successful in obtaining additional financing. If the Company is
unable to raise the necessary capital resources to meet obligations as they come
due, the Company will at some point have to reduce or curtail its
operations.
1.2.1 Pebble Project
The Pebble property ("Pebble") is located in southwest Alaska,
approximately 17 miles from the villages of Iliamna and Newhalen, and
approximately 200 miles southwest of the city of Anchorage. Situated in an area
of rolling hills approximately 1,000 feet above sea-level and 60 miles from
tidewater on Cook Inlet, the site conditions are favorable for successful mine
site and infrastructure development.
1.2.1.1 Project History
The Pebble deposit was discovered in 1987 by a prior operator,
which by 1997 had developed an initial outline of the deposit.
Northern Dynasty acquired the right to earn an interest in the
Pebble property in 2001. Exploration since that time has led to significant
expansion of the mineral resources in the Pebble deposit, including a
substantial volume of higher grade mineralization in its eastern part. The
deposit also remains open to further expansion at depth and to the east. In
addition, a number of other occurrences of copper, gold and molybdenum have been
identified along the extensive northeast-trending mineralized system that
underlies the property. The potential of these earlier-stage prospects has not
yet been fully explored.
Comprehensive deposit delineation, environmental, socioeconomic
and engineering studies of the Pebble deposit began in 2004. More recently, a
Preliminary Assessment of the Pebble Project was completed in 2011, which
provided insights into the size and scale of project that the Pebble resource
might support. The Pebble Partnership continued to undertake detailed
engineering, environmental and socioeconomic studies over the next two years. In
February 2014, the US Environmental Protection Agency ("EPA") announced a
preemptive regulatory action under the Clean Water Act ("CWA") to
consider restriction or a prohibition of mining activities associated with the
Pebble deposit.
From 2014-2017, Northern Dynasty and the Pebble Partnership
focused on a multi-dimensional strategy, including legal and other initiatives
(see section 1.2.1.2) to ward off this action. These efforts were successful,
resulting in the joint settlement agreement announced on May 12, 2017 (see
section 1.2.1.3, Joint Settlement
Agreement). Site and office studies are now
underway to progress toward a final project design to take the Pebble Project
into an EIS permitting process under NEPA, which will be led by the US Army
Corps of Engineers.
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| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
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From 2001, when Northern Dynasty’s involvement at the Pebble
Project began, to September 30, 2017, a total of $830 million (US$769 million)
has been invested to advance the project.2
1.2.1.2 Technical Programs
The objectives of the 2017 technical program are to finalize a
development design concept and the necessary documentation to initiate state and
federal permitting. Studies to consider the site layout, mine throughput and
project infrastructure are underway. Activities include data collection in the
field and compilation and design studies by consultants and in-house staff in
the corporate offices.
Site Operations
The 2017 field program, directed toward data collection and
logistics support for engineering and environmental field studies is now,
largely, completed. Site activities also included a borehole monitoring and
inspection program and maintenance, remediation and repair work was carried, as
necessary.
Engineering
Office and field studies are being conducted to investigate and
advance/update the project design, and include assessments of a number of
alternatives, including:
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smaller mine concepts, including site layouts
and waste management facilities; |
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alternate ore treatment options; |
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alternate tailings storage facility designs,
including water management schemes and lined PAG3 storage; |
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water treatment plants and development of
surplus wa3ter release strategies; |
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transportation corridor to the south of Lake
Iliamna, including road and ferry options; |
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facilities associated with the transportation
corridor, including ferry landing sites; |
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a port facility on Cook Inlet, southeast of
Lake Iliamna, at the terminus of the transportation corridor; and |
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a natural gas-fired power plant and associated
gas pipeline. |
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2 Of
this, approximately $595 million (US$573 million) was provided by a wholly-owned
subsidiary of Anglo American plc which participated in the Pebble Partnership
from 2007 to 2013, and the remainder was financed by Northern Dynasty. A major
part of the expenditures during the period 2007 to 2013 were on exploration
programs, resource estimates, environmental data collection and technical
studies, with a significant portion spent on engineering of various possible
mine development models, as well as related infrastructure, power and
transportation systems. The technical and engineering studies that were
completed relating to mine-site and infrastructure development are not
considered to be current or necessarily representative of management’s current
understanding of the most likely development scenario for the Project.
Accordingly, the Company is uncertain whether it can realize significant value
from this prior work. Environmental baseline studies and data, as well as
geological information from exploration, remain important information available
to the Company from this period in continuing its advancement of the
Project.
3 Potentially Acid Generating material
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| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
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2017 Field Program
The 2017 engineering field program was designed to collect
additional data to support the project design, with specific focus on the
proposed transportation corridor. This work completed to date in 2017 includes:
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a geophysical survey to ascertain the subsurface conditions
at the proposed port site on Cook Inlet; |
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bathymetric surveys at the proposed
port site on Cook Inlet and the proposed ferry landings on the north and south
side of Lake Iliamna; |
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aerial photography to extend the digital mapping to the
complete transportation corridor; and |
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reconnaissance of the proposed
transportation corridor to identify alternatives that minimize environmental and
social impacts. |
In addition to the completed work, work is underway to
fabricate instrumentation to collect additional ocean data at the port site. It
is expected these instruments will be installed by year end.
Environmental and Socioeconomic
Environmental Baseline Document and Supplemental
Environmental Baseline Document
The purpose of the Environmental Baseline Document (“EBD”) and
Supplemental EDB is to provide the public, regulatory agencies and the Pebble
Partnership with a detailed compendium of pre-development environmental and
socioeconomic conditions in the project area.
The 27,000-page EBD for the Pebble Project was released to the
public by the Pebble Partnership in January 2012. It is based on extensive
environmental baseline data that has been collected since 2004 with the goal to
design and plan a project that protects clean water, healthy fish and wildlife
populations, and other natural resources in the region. The work was conducted by more than 40
respected independent research firms, utilizing over 100 scientific experts and
engineering groups, laboratories and support services. Researchers were selected
for their specific areas of expertise and Alaskan experience, with cooperating
government agencies participating in several studies. Information for the EBD
was gathered through field studies, laboratory tests, review of government
records and other third-party sources, and interviews with Alaska residents.
The 2012 EBD characterizes a broad range of environmental and
social conditions in southwest Alaska – including climate, water quality,
wetlands, fish and aquatic habitat, wildlife, land and water use, socioeconomics
and subsistence activities during the period 2004-2008 and from some disciplines
in 2009. The EBD study is available at http://pebbleresearch.com/.4 The full range
of data from 2009-2013 period is currently being compiled as part of the 2017
program, and will be presented in the Supplemental EBD (2009 to 2013).
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4 The
Pebble Partnership also facilitated a four-day workshop with federal and state
regulatory agencies in January 2012 to present the EBD findings. The workshop
was broadcast publicly via the Internet. In addition, a series of public
presentations of the EBD findings was coordinated in more than 20 communities
throughout southwest Alaska and elsewhere around the State. Public and expert
review of the EBD was facilitated under the Keystone initiative, an independent
stakeholder dialogue process initiated in late 2010 by the Keystone Center – a
non-profit organization specializing in facilitating stakeholder-driven
consultation processes concerning contentious, science-based issues.
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| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
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2017 Field Program
The 2017 environmental field program was designed to collect
additional multidisciplinary environmental baseline data for proposed
infrastructure, such as access routes, port and ferry landing sites with the
objective of characterizing the existing conditions for engineering design and
permitting purposes. The program also includes wetland polygon mapping of the
proposed mine site and off-site infrastructure areas.
The Pebble environmental team will also provide
multi-disciplinary scientific input to:
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the engineering design team in order to
optimize transportation corridor alignments while avoiding/minimizing
routes in critical habitat areas, and to finalize the site water balance
and strategic water release plan to protect downstream fish habitat; |
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prepare the CWA 404 permit application
submission to the US Army Corp of Engineers; and |
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the Public Affairs team to assist with their
stakeholder outreach program. |
All of this work is directed toward preparation and submission
of the NEPA submission package, which includes the final Project Description,
Alternatives Assessment, Mitigation Plan and Reclamation and Closure Plan.
Community Engagement
The Pebble Project technical programs are supported by
stakeholder engagement activities in Alaska to advance and strengthen
relationships with Alaska Native partners and broader stakeholder groups as well
as people in political and regulatory offices of government (both in Alaska and
Washington, D.C.).
Through our numerous stakeholder initiatives, the Company seeks
to create a science-based project design more responsive to stakeholder concerns
that bring benefits to local residents, businesses and Alaska Native village
corporations, and energizes the economy of Southwest Alaska.
In 2017, the Pebble Partnership established the Pebble Project
Advisory Committee, comprised of prominent Alaskan and national figures to
provide independent, external advice on the Pebble Project as it advances into
federal and state permitting.
1.2.1.3 Legal Matters
Joint Settlement Agreement
From 2014-2017, Northern Dynasty and the Pebble Partnership
were focused on a multi-dimensional strategy that included legal and other
initiatives designed to ward off a pre-emptive regulatory action by the EPA
under the Clean Water Act. The strategy had a successful outcome.
On May 12, 2017, Northern Dynasty announced that the Pebble
Partnership and the EPA had reached a joint settlement agreement over the
federal agency’s pre-emptive regulatory action. Key aspects of the agreement
include:
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The EPA agreed the Pebble Project can proceed into normal
course permitting under the CWA and NEPA, and that it cannot seek to
utilize its authority under CWA 404(c) until such time as a final EIS has
been completed by the US Army Corps of Engineers, so long as that occurs
within a period of four years following the settlement agreement, and that
the Pebble Partnership files permit applications within 30 months of the
date of the settlement agreement. |
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| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
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EPA further agreed to initiate a process to consider
withdrawing the Proposed Determination it issued under CWA 404(c) in July
2014. The beginning of this process was announced on July 11, 2017, and a
public comment period concluded on October 17, 2017. Final agency action
is expected in 2018. |
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The Pebble Partnership agreed to terminate permanently
and with prejudice two lawsuits it brought against EPA: an action under
the Federal Advisory Committee Act and an action under the
Freedom of Information Act. |
A copy of the joint settlement agreement is posted under the
Company’s SEDAR and EDGAR profiles at www.sedar.com
and www.sec.gov, respectively.
The following is a chronology of the events and the actions and
initiatives by Northern Dynasty and the Pebble Partnership that ultimately led
to the joint settlement agreement.
Environmental Protection Agency and Bristol Bay Watershed
Assessment
In February 2011, the EPA announced it would undertake a
Bristol Bay Watershed Assessment study focusing on the potential effects of
large-scale mine development in Bristol Bay and, specifically the Nushagak and
Kvichak area drainages. This process was ostensibly initiated in response to
calls from persons and groups opposing the Pebble Project for the EPA to
pre-emptively use its asserted authority under Section 404(c) of the CWA to
prohibit discharges of dredged or fill material in waters of the US within these
drainages. However, evidence exists that the EPA may have been considering a
Section 404(c) veto of the Pebble Project at least as far back as 2008 – two
years before it received a petition from several Alaska Native tribes.
The EPA’s first draft Bristol Bay Watershed Assessment ("BBWA")
report was released on May 18, 2012. In the Company’s opinion after review with
its consultants, the draft report is a fundamentally flawed document. By the
EPA’s own admission, it evaluated the effects of a "hypothetical project" that
has neither been defined nor proposed by the Pebble Partnership, and for which
key environmental mitigation strategies have not yet been developed and, hence,
would not yet be known. It is believed by the Company that the assessment was
rushed – because it was based on studies conducted over only one year in an area
of 20,000 square miles. In comparison, the Pebble Project has studied the
ecological and social environment surrounding Pebble for over a decade. The EPA also failed to adequately consider the
comprehensive and detailed data that the Pebble Partnership provided as part of
its 27,000-page Environmental Baseline Document.
The EPA called for public comment on the quality and
sufficiency of scientific information presented in the draft BBWA report. In
response, the Pebble Partnership and Northern Dynasty made submissions on the
draft report. Northern Dynasty made a presentation highlighting these
shortcomings at public hearings held in Seattle, Washington, on May 31, 2012 and
in Anchorage, Alaska, on August 7, 2012. In July 2012, the Company also
submitted a 635-page critique of the draft report in response to the EPA’s call
for public comment, and called upon the EPA to cease such unwarranted actions
until such time as a definitive proposal for the development of the Pebble
deposit is submitted into the NEPA permitting process.
Concerns about the reasonableness of the basis of risk
assessment in the draft EPA report were stated by many of the independent
experts on the peer review panel assembled to review the BBWA, as summarized, in
a report entitled External Peer Review of EPA's Draft Document: An Assessment
of Potential Mining Impacts on Salmon Ecosystems of Bristol Bay, Alaska
released in November 2012. In a wide-ranging critique of the draft report's
methodology and findings, many peer review panellists called the EPA's effort to
evaluate the effects of a "hypothetical mining scenario" on the water, fish,
wildlife and cultural resources of Southwest Alaska "inadequate", "premature",
"unreasonable", “suspect" and "misleading".
Page | 12
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
On April 26, 2013, the EPA released a revised draft of the BBWA
report and announced another public comment and Peer Review period. The Pebble
Partnership and Northern Dynasty made submissions on the revised draft. In late
May 2013, Northern Dynasty filed a 205-page submission which describes the same
major shortcomings as the original report published in May 2012.
In mid-January 2014, the EPA released the final version of its
BBWA. The report still reflects many of the same fundamental shortcomings as
previous drafts.
On February 28, 2014, the EPA announced the initiation of a
pre-emptive regulatory action under Section 404(c) of the CWA to consider
restriction or a prohibition on mining activities associated with the Pebble
deposit in order to protect aquatic resources in southwest Alaska. In late April
2014, the Pebble Partnership submitted a comprehensive response to the EPA’s
February 28, 2014 notification letter.
Statutory Authority action
In late May 2014, the Pebble Partnership filed suit in the US
District Court for Alaska and sought an injunction to halt the pre-emptive
regulatory action initiated by the EPA under the CWA, asserting that, in the
absence of a permit application, the action exceeds the federal agency’s
statutory authority and violates the Alaska Statehood Act among other federal
laws. The State of Alaska and Alaska Peninsula Corporation, an Alaska Native
village corporation with extensive land holdings in the Pebble Project area,
later joined in the Pebble Partnership’s lawsuit against the EPA as
co-plaintiffs. On September 26, 2014, a US federal court in Alaska granted the
EPA’s motion to dismiss the case. This ruling did not judge the merits of the
statutory authority case, it only deferred that hearing and judgment until after
a final Section 404(c) determination has been made by the EPA. If or when the
EPA action is deemed "final", the Pebble Partnership will pursue the underlying
case. The Company also appealed the decision to grant the motion to dismiss to
the 9th Circuit Court of Appeals. This appeal was denied in May 2015. The Pebble
Partnership retained the option to pursue its statutory authority case in the
instance that EPA finalized a pre-emptive regulatory action under the CWA.
Proposed Determination
On July 18, 2014, EPA Region 10 announced a "Proposed
Determination" to restrict the discharge of dredged or fill material associated
with mining the Pebble deposit in a 268 square mile area should that disposal
result in any of the following: loss of five or more miles of streams with
documented salmon occurrence; loss of 19 or more miles of streams where salmon
are not documented but that are tributaries of streams with documented salmon occurrence; the loss of 1,100 or more acres of wetlands,
lakes, and ponds that connect with streams with documented salmon occurrence or
tributaries of those streams; and stream flow alterations greater than 20
percent of daily flow in nine or more linear miles of streams with documented
salmon occurrence. Northern Dynasty management did not accept that the EPA has
the statutory authority to impose conditions on development at Pebble, or any
development project anywhere in Alaska or the US, prior to the formal submission
of a development plan and its thorough review by federal and state agencies
including development of an Environmental Impact Statement and review under
NEPA.
On September 19, 2014, the Pebble Partnership submitted a
comprehensive legal and technical response to EPA Region 10’s Proposed
Determination. Northern Dynasty and the Pebble Partnership maintained that the
Proposed Determination is flawed and unsupported by the administrative record as
established by the Bristol Bay Watershed Assessment, and was therefore arbitrary
and capricious.
Page | 13
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
As part of the settlement agreement announced on May 12, 2017,
EPA agreed to initiate a process to withdraw the Proposed Determination that
would have restricted the development of the Pebble Project. The beginning of
this process was announced on July 11, 2017, and a public comment period
concluded on October 17, 2017. Final agency action is expected in 2018.
Federal Advisory Committee Act ("FACA") action
On September 3, 2014, the Pebble Partnership initiated a second
action against EPA in federal district court in Alaska charging that EPA
violated the FACA due to the federal agency’s close interactions with, and the
undue influence of Environmental Non-Governmental Organizations and anti-mining
activists in developing the BBWA, and with respect to its unprecedented
pre-emptive regulatory action under the CWA. On September 24, 2014, the
US federal court judge in Alaska released an order recognizing that the EPA
agreed not to take the next step to advance its 404(c) regulatory action with
respect to southwest Alaska’s Pebble Project until at least January 2, 2015.
Preliminary Injunction
On November 24, 2014, a US federal court judge in Alaska
granted the Pebble Partnership’s request for a preliminary injunction in
relation to the FACA case. While the preliminary injunction did not resolve the
Pebble Partnership’s claims that the EPA actions with respect to the BBWA and
subsequent 404(c) regulatory action violated FACA, the decision permitted the
further discovery process of the underlying facts to enable the court to issue a
final decision on the merits of the FACA case. Granting of a preliminary
injunction also reflected the court’s view that PLP had a likelihood of
prevailing on the merits of its case. On June 4, 2015, the federal court in
Alaska issued an order denying the EPA’s motion to dismiss this case.
The Pebble Partnership filed numerous requests for production
of documents and received tens of thousands of documents produced by the EPA.
The Pebble Partnership also served a number of notices of depositions for
current and former EPA employees, EPA contractors and relevant third parties.
More than a dozen depositions of EPA witnesses were completed. Additionally, the
Pebble Partnership had asked the Court to compel the Agency and certain third
parties to produce documents relevant to its FACA claims that are being
improperly withheld. Had the Pebble Partnership prevailed in its FACA litigation
against the EPA, the federal agency may have been unable to rely upon the BBWA
as part of the administrative record for any regulatory action at the Pebble
Project.
On October 27, 2016, the Pebble Partnership and the EPA filed a
joint Notice in federal court stating their intent to enter into mediation in an
effort to resolve ongoing litigation under FACA.
The Pebble Partnership and the EPA filed several joint Notices
in federal court to stay the ongoing FACA litigation between December 30, 2016
and May 11, 2017, although the Court’s November 2014 Preliminary Injunction remained in effect. During this period, the Pebble
Partnership and the EPA engaged in direct discussions, which led to the joint
settlement agreement announced on May 12, 2017.
Freedom of Information Act ("FOIA") action
On October 14, 2014, the Pebble Partnership filed suit in
federal district court in Alaska charging that EPA has violated the FOIA by
improperly withholding documents related to the Pebble Project, the Bristol Bay
Watershed Assessment and consideration of a pre-emptive 404(c) veto under the
CWA. The EPA moved for summary judgment claiming that its search for and
disclosure of documents was adequate. The Pebble Partnership opposed the
government’s motion, pointing out several deficiencies in the EPA’s search
parameters and the agency’s overly broad assertion of the deliberative process
privilege to withhold documents. On August 24, 2015, the US federal court judge
granted in part and deferred in part the EPA’s motion for summary judgement on
the FOIA litigation. The court accepted the EPA’s position that it had made an
adequate search for documents but left the matter open should the EPA not meet
its obligations in the FACA litigation or if additional documents surface.
Additionally, the judge ordered EPA to produce a sample of 183 partially or
fully withheld documents so that it could conduct an in-camera review of the
sample and test the merits of EPA’s withholdings under the deliberative process
privilege. Before producing this sample to the Court, EPA chose to voluntarily
release 115 documents (or 63% of the sample ordered by the Court), relinquishing
its claim of privilege as to these documents.
Page | 14
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
In briefings before the Court, the Pebble Partnership argued
that the voluntary release of 63% of the agency’s same documents conclusively
demonstrated that the EPA had been over broad in its assertion of the
deliberative process privilege, particularly because the content of the
voluntarily released documents was not in fact deliberative. The Court agreed,
finding that EPA "improperly withheld documents in full," and that "many of the
documents that defendant released should have been released to begin with
because the portions that defendant released were not deliberative." It then
ordered the EPA to review an additional 65 documents. Of these 65 documents, the
EPA voluntarily released 55 documents in whole or in part (or 85% of the
documents). Given the EPA’s high rate of release, the Pebble Partnership
submitted a brief to the Court arguing that the EPA should be forced to review
the remaining documents being withheld and arguing that judgment should not be
granted to the agency at this time. The Court agreed, concluding that it had "no
confidence that [EPA] has properly withheld documents, either in full or in
part, pursuant to the deliberative process privilege." The Court reiterated its
earlier finding that EPA had been withholding documents that "should never have
been withheld to begin with." As a result, the Court ordered the Agency to
re-evaluate all remaining documents EPA is withholding in response to the Pebble
Partnership’s January 2014 FOIA request and to submit these documents for
in-camera review. After this review, the Court issued an order resolving
Pebble’s challenges to the remaining withholdings and forcing EPA, yet again, to
produce additional documents that the agency had been improperly withholding for
over two years.
Office of the EPA Inspector General ("OIG") review
Counsel for Northern Dynasty and the Pebble Partnership
submitted numerous letters to the independent OIG since January 2014, raising
concerns of apprehension of bias, process irregularities and undue influence by
environmental organizations in the EPA's preparation of the Bristol Bay
Watershed Assessment. In response to Congressional and other requests, on May 2,
2014, the OIG announced that it would investigate the EPA’s conduct in preparing
An Assessment of Potential Mining Impacts on Salmon Ecosystems of Bristol
Bay, Alaska, "to determine whether the EPA adhered to laws, regulations,
policies and procedures in developing its assessment of potential mining impacts
in Bristol Bay, Alaska." On January 13, 2016, the OIG published its report (the
"OIG Report"). While acknowledging significant “scope limitations” in its review
and subsequent OIG Report, the OIG concluded that: “we found no evidence of bias
in how the EPA conducted its assessment of the Bristol Bay watershed, or that
the EPA pre-determined the assessment outcome,” but that an EPA Region 10
employee may have been guilty of “a possible misuse of position.”
Several other investigations of EPA conduct at Pebble
contradict the OIG Report. The US Congress’ House Committee on Oversight and
Government Reform found “that EPA employees had inappropriate contact with
outside groups and failed to conduct an impartial, fact-based review of the
proposed Pebble mine.” In addition, a report by former United States Senator and
Defense Secretary William S. Cohen and his firm (further described below), said
their investigation “raise(s) serious concerns as to whether EPA orchestrated
the process to reach a pre-determined outcome; had inappropriately close
relationships with anti-mine advocates; and was candid about its decision-making
process.”
Page | 15
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
The findings of the OIG Report did not materially affect the
Pebble Partnership’s strategy for addressing the EPA’s CWA Section 404(c)
regulatory action. The Company remained confident that the Pebble Project would
ultimately enter federal and state permitting unencumbered by any extraordinary
development restrictions, a belief borne out by the joint settlement agreement
reached with EPA in May 2017.
Cohen report
In March 2015, William Cohen and his firm, The Cohen Group,
assisted by the law firm DLA Piper, was retained by the Pebble Partnership to
conduct an independent review of whether the EPA acted fairly in connection with
its evaluation of potential mining in the Bristol Bay watershed. Secretary Cohen
was requested to evaluate the fairness of EPA's actions and decisions in this
matter based upon a thorough assessment of the facts and relying on his
experience as a senior government official, as well as his 24 years as a member
of the US Senate and House of Representatives.
A team of independent investigators employed by The Cohen Group
and DLA Piper reviewed thousands of documents secured through FOIA requests and
interviewed approximately 60 individuals involved with the EPA or its review of
the Pebble Project. On October 6, 2015, Mr. Cohen released his report entitled
Report of an Independent Review of the United States Environmental Protection
Agency’s Actions in Connection with its Evaluation of Potential Mining in
Alaska’s Bristol Bay Watershed. The report stated the conclusion of Mr.
Cohen that he did not believe the EPA used the "fairest and most appropriate
process" in its proposed preemptive regulatory action under the CWA.
Mr. Cohen urged policymakers to require that the permitting
process under NEPA and the regulations developed by the Council on Environmental
Quality (the "Permit/NEPA Process") be followed. Mr. Cohen commented that the
Permit/NEPA Process is more comprehensive than the pre-emptive Section 404(c)
action employed by the EPA and he could find no valid reason why that process
was not used.
The Cohen report also raised a number of concerns about the
EPA’s Bristol Bay Watershed Assessment study and the CWA Section 404(c)
regulatory action, including possible prejudice and pre-determination of
outcomes by the EPA, inappropriately close relationships between certain EPA
officials and anti-mine advocates, EPA’s candor with respect to certain actions
it took, lack of consistency between the BBWA and the proposed determination,
and lack of cooperation by EPA personnel with respect to Congressional queries
and FOIA requests.
Northern Dynasty does not consider the Cohen report to
constitute an "expert’s" report but rather considers it to constitute an
informed view of the Company’s treatment by the EPA expressed by a person
familiar with governmental due process goals. Mr. Cohen also appeared before a
Congressional committee (House Committee on Science, Space and Technology) with
respect to the findings in his report.
US House Committee on Science, Space and Technology
On February 22, 2017, the US House Committee on Science, Space
and Technology Chairman, Lamar Smith, sent a letter to the EPA Administrator
Scott Pruit recommending that "the incoming Administration rescind the EPA’s
proposed determination to use Section 404(c) in a pre-emptive fashion for the
Pebble Mine in Bristol Bay, Alaska. This simple action would allow a return to
the long-established CWA permitting process and stop attempts by the EPA to improperly expand its authority.
Moreover, it would create regulatory certainty for future development projects
that will create jobs and contribute to the American economy."
Page | 16
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
Northern Dynasty and the Pebble Partnership have been
represented by respected international law firm Steptoe & Johnson LLP
("Steptoe"). Effective from August 1, 2016, Steptoe and the Pebble Partnership
agreed to cap legal fees paid related to the FACA suit and other ongoing legal
matters to the point at which motions for summary judgment in the case have been
fully argued to the court and are ripe for adjudication. With the joint
settlement agreement, Steptoe and a former Steptoe lawyer whose services the
Pebble Partnership continued to use are due a success fee payment. The Company
has included the amount payable in the Interim Financial Statements (see
1.6 Liquidity for
further details).
Other Matters
On February 14, 2017, short seller investment firm Kerrisdale
Capital Management LLC published a negative piece (the "Kerrisdale Report")
regarding the Pebble Project. Three putative shareholder class actions were
filed against the Company and certain of its current officers and directors in
US federal courts, specifically the Central District of California (Los Angeles)
and the Southern District of New York (New York City). The cases are captioned:
Diaz v. Northern Dynasty Minerals Ltd. et al, Case No. 17-cv-01241 (C.D.
Cal.); Kirwin v. Northern Dynasty Minerals Ltd. et al, Case No. 17-cv-01238
(S.D.N.Y.); and Schubert v. Northern Dynasty Minerals, Ltd., et al., Case No.
1:17-CV-02437 (S.D.N.Y.). The complaints appear to rely on the claims made
in the Kerrisdale Report and allege damages to a class of investors who
purchased shares of the Company prior to the publication of the Kerrisdale
Report and allege liability for losses pursuant to Section 10(b) of the Exchange
Act of 1934 and SEC Rule 10b-5 thereunder, as well as control person liability
against the individual defendants pursuant to Section 20(a) of the Exchange
Act.
The plaintiffs in both the Kirwin and Schubert
actions voluntarily dismissed their claims without prejudice. The plaintiffs
in the Diaz action continue to litigate and recently filed an amended
complaint. The Company will be filing a motion to dismiss it with the court in
the coming months. The Company believes that the allegations in the remaining
complaint are without merit, and it intends to defend itself vigorously in the
Diaz action.
For further information, refer to the Company’s 2016 Annual
Information Form which is filed under the Company’s profile on www.sedar.com.
1.2.2 Financing
US$37.4 Million Bought Deal
In January 2017, the Company completed a bought deal offering
of 20,240,000 common shares at a price of US$1.85 per unit for gross proceeds of
approximately US$37.4 million. The offering was made through a syndicate of
underwriters co-led by Cantor Fitzgerald Canada Corporation, TD Securities Inc.
and BMO Capital Markets.
Part of the net proceeds were used to advance the Company’s
Multi-dimensional Strategy to address the preemptive regulatory action of the
EPA under Section 404 (c) of the CWA and the balance will be used for (i)
preparations to initiate federal and state permitting under NEPA; (ii)
environmental monitoring, engineering and environmental studies, field
investigations and related technical studies to finalize a proposed development
plan for the Pebble Project; (iii) enhanced outreach and engagement with
political and regulatory offices in the Alaska state and U.S. federal government
and among Alaska Native partners and broader regional and statewide stakeholder
groups; (iv) Alaskan corporate, tenure and site maintenance; (v) general
corporate purposes; and (vi) working capital requirements.
Page | 17
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
1.2.3 Market Trends
Copper prices were variable in 2013, 2014 and 2015, and the
average annual price decreased each year. Prices were variable to improving for
most of 2016 and early 2017. A sustained uptrend began in May 2017. The recent
closing price is US$3.08/lb.
In 2013, an uptrend in gold prices that had extended over
several years came to an end. Prices were variable from 2013 to 2015, and the
average annual prices decreased. Gold prices trended upward for most of 2016,
with a drop late in the year. Prices have shown some variability, but trended
upward in 2017. The recent closing price is US$1,285/oz.
Molybdenum prices weakened in 2012 and 2013. Prices increased
from January to August 2014, then began a downtrend that continued to the end of
2015. Prices improved in the first half of 2016, then dropped slightly and,
largely, have been flat since that time, with a recent price of US$7.26/lb.
Silver prices were buoyant, ranging between $26/oz and $35/oz
between October 2011 and the end of 2012, then trended downward in 2013. Prices
were variable in 2014 and 2015, with the average annual prices decreasing in
both years. Prices were variable to increasing during most of 2016, but dropped
late in the year. In 2017, silver prices have been variable, tracking gold for
the first four months, dropping in May and becoming variable since that time,
with a recent price of US$17.10/oz.
Average annual prices of copper, gold, molybdenum and silver
for the past four years as well as the average prices so far in 2017 are shown
in the table below:
Year
|
Average metal price 1
|
Copper
US$/lb |
Gold
US$/oz |
Molybdenum
US$/lb |
Silver
US$/oz |
| 2013 |
3.32 |
1,410 |
10.40 |
23.80 |
| 2014 |
3.14 |
1,276 |
11.91 |
19.08 |
| 2015 |
2.49 |
1,160 |
6.73 |
15.68 |
| 2016 |
2.21 |
1,251 |
6.56 |
17.14 |
| 2017 (to the date of this MD&A) |
2.76 |
1,255 |
7.26 |
17.13 |
1. Source: LME Official Cash Price as provided at
www.metalprices.com
Page | 18
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
1.3 Selected
Annual Information
Not required for an interim MD&A.
1.4 Summary and
Discussion of Quarterly Results
All monetary amounts are expressed in thousands of dollars
except per share amounts and where otherwise indicated. Minor differences are
due to rounding.
Excerpts from
Statements
of Comprehensive Loss
(Income) |
|
Sep
30
2017 |
|
|
Jun 30
2017 |
|
|
Mar 31
2017 |
|
|
Dec 31
2016 |
|
|
Sep
30
2016 |
|
|
Jun 30
2016 |
|
|
Mar 31
2016 |
|
|
Dec 31
2015 |
|
| Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exploration and evaluation |
$ |
9,807 |
|
$ |
3,929 |
|
$ |
1,780 |
|
$ |
2,610 |
|
$ |
2,006 |
|
$ |
1,294 |
|
$ |
2,025 |
|
$ |
3,374 |
|
| General and administrative |
|
1,980 |
|
|
2,757 |
|
|
2,548 |
|
|
1,311 |
|
|
1,444 |
|
|
1,844 |
|
|
2,130 |
|
|
1,813 |
|
| Legal, accounting and audit 1 |
|
1,475 |
|
|
22,227 |
|
|
1,305 |
|
|
984 |
|
|
1,286 |
|
|
3,318 |
|
|
3,854 |
|
|
6,379 |
|
| Share-based compensation |
|
3,474 |
|
|
558 |
|
|
507 |
|
|
714 |
|
|
1,939 |
|
|
186 |
|
|
156 |
|
|
469 |
|
| Other items 2
|
|
1,152 |
|
|
712 |
|
|
(729 |
) |
|
(95 |
) |
|
(68 |
) |
|
(54 |
) |
|
98 |
|
|
373 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss for the quarter |
$ |
17,888 |
|
$ |
30,183 |
|
$ |
5,411 |
|
$ |
5,524 |
|
$ |
6,607 |
|
$ |
6,588 |
|
$ |
8,263 |
|
$ |
12,408 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per
common share |
$ |
0.06 |
|
$ |
0.10 |
|
$ |
0.02 |
|
$ |
0.02 |
|
$ |
0.02 |
|
$ |
0.03 |
|
$ |
0.04 |
|
$ |
0.07 |
|
Weighted average
number
of common shares (000s) |
|
303,962 |
|
|
301,220 |
|
|
290,650 |
|
|
266,767 |
|
|
264,622 |
|
|
230,920 |
|
|
222,106 |
|
|
181,339 |
|
| 1. |
Primarily legal costs incurred by the Group in response
to the EPA’s activities surrounding the Pebble Project and from Q1 2017,
response to the Kerrisdale Report and securities class actions (discussed
in "Other Matters" under 1.2.1.3 Legal
Matters). In Q2, 2017, following the
settlement with the EPA, additional legal fees became payable (see
discussion below). |
| |
|
| 2. |
Other items include interest income and expense, exchange
gain or loss, gain or loss on disposal of financial assets and plant and
equipment and deferred income tax recovery. |
Discussion of Quarterly Trends
Exploration and evaluation expenses ("E&E") increased in Q2
and Q3 of 2017 as the Company initiated a program of engineering and
environmental studies, field investigations and related technical studies with
the objective of finalizing a proposed development plan and preparing
documentation for federal and state permitting. In Q3 2017, the Company recorded
the annual claim rental fees payable as compared to the prior years where those
fees were recorded in the last quarter of the year. Prior to Q2 2017, E&E
trended down other than in the last quarter of each year when the Company paid
its annual claim rental fees. E&E includes costs for Native community
engagement, select environmental monitoring programs, annual fees for claims
(paid in Q4 each year), site leases, land access agreements and technical
studies undertaken.
General and administrative expenses ("G&A") have fluctuated
based on the level of corporate and financing activities undertaken and have
trended down since Q1 2016 but have increased in 2017. In Q1 and Q2 2017,
G&A included the costs of discretionary bonuses paid relating to the 2015
and 2016 fiscal periods respectively as well as a performance bonus relating to
the completion of the bought deal financing. In Q3 2017, the Group paid a
short-term incentive bonus/compensation to its Board’s Chair, CEO and CFO which
was settled 20% in cash and 80% in RSUs.
Page | 19
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
Legal, accounting and audit expenses increased significantly in
Q2 2017 as the Company recorded additional legal fees payable of US$15.8 million
following the settlement agreement with the EPA (refer Section 1.2.1.3, Joint Settlement
Agreement). In Q1, Q2 and Q3 2017, the Company also incurred
approximately US$946,000 in legal costs relating to the Company’s response to
the Kerrisdale Report including securities class actions.
Share-based compensation expense ("SBC") has fluctuated due to
the timing and quantum of share purchase option ("option") grants and the
vesting periods associated with these grants. Grants of options occurred in Q3
2017 (5,808,000 options), Q3 2016 (6,206,000 options), Q1 2016 (600,000 options)
and Q4 2015 (3,657,500 options). Grants of deferred share units ("DSUs") and
restricted share units (“RSUs”) also impacted SBC. There were grants in Q3 2017
of 542,371 RSUs and in Q3 2016 of 639,031 RSUs and 458,129 DSUs.
1.5 Results of
Operations
The following financial data has been prepared from the
Financial Statements for the three and nine months ended September 30, 2017, and
is expressed in thousands of Canadian dollars unless otherwise stated.
The Company’s operations and business are not driven by
seasonal trends, but rather are driven towards the achievement of project
milestones relating to the Pebble Project such as the achievement of various
technical, environmental, socio-economic and legal objectives, including
obtaining the necessary permits, the completion of pre-feasibility and final
feasibility studies, preparation of engineering designs, as well as receipt of
financings to fund these objectives along with mine construction.
1.5.1 Results of Operations – Three
and Nine Months Ended September 30, 2017 versus 2016
For the three months, the Company recorded an increase in loss
of $11.3 million due primarily to the increase in E&E of $7.8 million, the
increase in SBC of $1.5 million and an increase in foreign exchange losses of
$1.3 million.
For the nine months, the Company recorded an increase in loss
of $32.0 million due primarily to the increases in legal, accounting and audit
expenses ($16.5 million), E&E ($10.2 million), SBC ($2.2 million) and
G&A ($2.0 million).
The breakdown of E&E as compared to 2016, expressed in
thousands of dollars, is as follows:
| E&E |
|
Three months |
|
|
Nine
months |
|
| |
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
| Engineering |
$ |
1,856 |
|
$ |
184 |
|
$ |
2,340 |
|
$ |
266 |
|
| Environmental |
|
1,722 |
|
|
160 |
|
|
2,370 |
|
|
538 |
|
| Property fees |
|
1,331 |
|
|
– |
|
|
1,338 |
|
|
– |
|
| Site activities |
|
1,949 |
|
|
319 |
|
|
3,225 |
|
|
971 |
|
| Socio-economic |
|
1,604 |
|
|
1,244 |
|
|
4,734 |
|
|
3,388 |
|
| Transportation |
|
1,161 |
|
|
38 |
|
|
1,240 |
|
|
99 |
|
| Other activities
and travel |
|
184 |
|
|
61 |
|
|
269 |
|
|
63 |
|
| Total |
$ |
9,807 |
|
$ |
2,006 |
|
$ |
15,516 |
|
$ |
5,325 |
|
In the current quarter, E&E increased by $7.8 million as
the company continued its field program at site and engineering and
environmental programs (see 1.2.1.2 Technical
Programs). Transportation costs increased as
the Company used helicopter charters for the field program. Property fees
increased as a result of the Company recording the annual claims rentals. In
2016, the claim rentals were recorded in the fourth quarter. In addition,
additional costs were incurred relating to the ongoing Alaska Native community
engagement and stakeholder outreach programs (see 1.2.1.2, Community Engagement).
Page |20
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
In the year to date, E&E was impacted by the increased
activities as result of field program and engineering and environmental programs
(1.2.1.2 Technical
Programs), the recording of annual claims rentals
and by the ongoing Alaska Native community engagement, stakeholder outreach
programs.
The following table provides a breakdown of G&A, and legal,
accounting and audit expenses incurred as compared to 2016, expressed in
thousands of dollars:
| |
|
Three months |
|
|
Nine
months |
|
| |
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
| Conference and travel |
$ |
61 |
|
$ |
131 |
|
$ |
307 |
|
$ |
291 |
|
| Consulting |
|
229 |
|
|
59 |
|
|
532 |
|
|
370 |
|
| Insurance |
|
113 |
|
|
105 |
|
|
315 |
|
|
316 |
|
| Office costs, including information technology |
|
238 |
|
|
143 |
|
|
670 |
|
|
652 |
|
| Management and administration |
|
1,108 |
|
|
859 |
|
|
4,360 |
|
|
3,126 |
|
| Shareholder communication |
|
223 |
|
|
142 |
|
|
845 |
|
|
497 |
|
| Trust and filing |
|
8 |
|
|
5 |
|
|
256 |
|
|
166 |
|
| Total G&A |
|
1,980 |
|
|
1,444 |
|
|
7,285 |
|
|
5,418 |
|
| Legal,
accounting and audit |
|
1,475 |
|
|
1,286 |
|
|
25,007 |
|
|
8,458 |
|
| |
$ |
3,455 |
|
$ |
2,730 |
|
$ |
32,292 |
|
$ |
13,876 |
|
G&A increased by $0.5 million in the current quarter as
compared to the prior year quarter due primarily to an increase in consulting
fees incurred and an increase in management and administration costs as the
Company paid a 2017 bonus/compensation to its board’s Chair, CEO and CFO which
was settled 20% in cash and 80% in RSUs.
In the year to date, G&A increased by $1.9 million due
primarily to the increase management and administration costs and shareholder
communication costs. Management and administration included payments for
discretionary bonuses in respect to the 2015 and 2016 fiscal years to the PLP
CEO and a 2017 bonus/compensation to the Company’s board Chair, CEO and CFO.
Shareholder communication increased due to higher costs for the annual general
meeting held in June 2017 and additional costs for updating the Company’s
website. Legal, accounting and audit costs increased by $16.5 million as the
Company recognized additional legal fees owing to legal counsel due to the joint
settlement agreement reached by the Pebble Partnership and the EPA (see 1.6 Liquidity and 1.2.1.3
Joint Settlement Agreement).
Other
SBC has fluctuated due to the timing and quantum of option
grants, RSUs and DSUs and the vesting periods associated with these grants. In
both 2017 and 2016, the Company issued grants of options and DSUs/RSUs in the
third quarter (2017 – 5,808,000 options and 542,371 RSUs; 2016 – 6,206,000
options, 458,129 DSUs and 639,031 RSUs). In Q1 2016, the Company also issued
600,000 options.
Page | 21
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
1.5.2 Financial position as at
September 30, 2017 versus December 31, 2016
The total assets of the Company increased by $21.0 million due
largely to the increase in cash and cash equivalents and held-to-maturity
investments as a result of the completion of the bought deal financing and
proceeds from the exercise of options and warrants during the period to
date.
1.6 Liquidity
The Company's major sources of funding has been the issuance of
equity securities for cash, primarily through private placements and prospectus
offerings to sophisticated investors and institutions, and the issue of common
shares pursuant to the exercise of options and warrants. The
Company's access to financing is always uncertain. There can be no assurance of
continued access to significant equity funding.
As at September 30, 2017, the Company had cash and cash
equivalents of $30.9 million which is represents an increase of $23.8 million
from December 31, 2016 as the Company completed a bought deal financing (refer
1.2.2 Financing) and
received $8.9 million from the exercise of options and warrants. The Company
employed $21.9 million in its operating activities in the nine months ended
September 30, 2017, and invested $6.8 million of available funds in guaranteed
investment certificates, which became available to the Company in November 2017.
The Company has prioritized the allocation of its available financial resources
in order to meet key corporate and Pebble Project expenditure requirements in
the near term (refer to the Company’s 2017 work programs in section 1.2.1.2 Technical Programs)
and have available financial resources to carry forward into the first quarter
of 2018. Additional financing will be required to pursue any material
expenditures at the Pebble Project in 2018. There can be no assurances that the
Company will be successful in obtaining additional financing at that point. If
the Company is unable to raise the necessary capital resources to meet
obligations as they come due, the Company will have to reduce or curtail its
operations at some point.
At September 30 2017, the Company had working capital of $25.4
million as compared to $6.4 million at December 31, 2016. The Company has no
capital lease obligations, operating leases or any other long-term obligations
other than those disclosed below:
The following commitments and payables (expressed in thousands)
existed at September 30, 2017:
| |
|
|
|
|
Payments due by period as of the reporting date |
|
| |
|
Total |
|
|
≤ 1
year |
|
|
1-5
years |
|
|
>
5 years |
|
| Trade and other payables |
$ |
13,181 |
|
$ |
13,181 |
|
$ |
– |
|
$ |
– |
|
| Payables to related parties |
|
538 |
|
|
538 |
|
|
– |
|
|
– |
|
| Lease commitments |
|
1,437 |
|
|
433 |
|
|
963 |
|
|
41 |
|
| Long-term payables
1 |
|
13,192 |
|
|
– |
|
|
13,192 |
|
|
– |
|
| Total |
$ |
28,348 |
|
$ |
14,152 |
|
$ |
14,155 |
|
$ |
41 |
|
Note
| 1. |
As a result of the joint settlement agreement announced
on May 12, 2017, the Company’s legal counsel, Steptoe and a former Steptoe
lawyer are due additional legal fees ("success fees") of US$16.6 million
of which US$5.4 million is payable in December 2017. The remaining amount
is payable as follows: US$0.6 million in the first quarter of 2018 and two
equal payments of US$5.3 million in December 2018 and 2019 respectively.
The latter two payments are included in long-term payables and the amount
payable this year and first quarter of 2018 of US$6.0 million in current
trade payables. Prior to the settlement, the Company had disclosed the
estimated success fees payable as a contingent
liability. |
Page | 22
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
The Company has no "Purchase Obligations", defined as any
agreement to purchase goods or services that is enforceable and legally binding
on the Company that specifies all significant terms, including fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. The Company is responsible for
maintenance payments on the Pebble Project claims and routine site and office
leases (included in table above).
1.7 Capital
Resources
The Company’s capital resources consist of its cash reserves,
which include its cash and equivalents and held-to-maturity investments. As at
September 30, 2017, other than noted in 1.6
Liquidity, the Company has no other
long-term debt and no commitments for material capital expenditures.
The Company has no lines of credit or other sources of
financing.
1.8 Off-Balance
Sheet Arrangements
As at September 30, 2017, the Company had no off-balance sheet
arrangements.
1.9 Transactions
with Related Parties
Transactions with Hunter Dickinson Services Inc. ("HDSI")
Hunter Dickinson Inc. ("HDI") and its wholly owned subsidiary,
HDSI are private companies established by a group of mining professionals
engaged in advancing and developing mineral properties for a number of private
and publicly-listed exploration companies, one of which is the Company.
Current directors of the Company namely Robert Dickinson and
Ron Thiessen are active members of the HDI Board of Directors. Marchand Snyman,
the Company’s CFO, is also an active member of the HDI Board of Directors. Other
key management personnel of the Company – Doug Allen, Stephen Hodgson, Bruce
Jenkins, Sean Magee and Trevor Thomas – are active members of HDI’s senior
management team.
The business purpose of the related party relationship
HDSI provides technical, geological, corporate communications,
regulatory compliance, administrative and management services to the Company, on
an as-needed and as-requested basis from the Company.
HDSI also incurs third party costs on behalf of the Company.
Such third party costs include, for example, directors and officers insurance,
travel, conferences, and technology services.
As a result of this relationship with HDSI, the Company has
ready access to a range of diverse and specialized expertise on a regular basis,
without having to engage or hire full-time experts. The Company benefits from
the economies of scale created by HDSI.
The measurement basis used
The Company procures services from HDSI pursuant to an
agreement (the "Services Agreement") dated July 2, 2010 whereby HDSI agreed to
provide technical, geological, corporate communications, administrative and
management services to the Company. A copy of the Services Agreement is publicly
available under the Company’s profile at www.sedar.com.
Page | 23
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
Services from HDSI are provided on a non-exclusive basis as
required and as requested by the Company. The Company is not obligated to
acquire any minimum amount of services from HDSI. The fees for services is
determined based on an agreed upon charge-out rate for each employee performing
the service and the time spent by the employee. The charge-out rate also
includes overhead costs such as office rent, information technology services and
administrative support. Such charge-out rates are agreed and set annually in
advance.
Third party expenses are billed at cost, without any markup.
Ongoing contractual or other commitments resulting from the
related party relationship
There are no ongoing contractual or other commitments resulting
from the Company’s transactions with HDSI, other than the payment for services
already rendered and billed. The agreement may be terminated upon 60 days’
notice from either the Company or HDSI.
Transactions during the Reporting Period and Balances with
HDSI at the end of the Reporting Period
Disclosure as to transactions with HDSI and any amounts due to
or from HDSI is provided in Note 8(b) in the notes to the Interim Financial
Statements which accompany this MD&A and which are available under the
Company’s profile at www.sedar.com.
Key Management Personnel
The required disclosure for the remuneration of the Company’s
key management personnel is provided in Note 8(a) in the notes to the Interim
Financial Statements which accompany this MD&A and which are available under
the Company’s profile at www.sedar.com.
1.10 Fourth Quarter
Not applicable.
1.11 Proposed Transactions
There are no proposed asset or business acquisitions or
dispositions, other than those in the ordinary course, before the Board of
Directors for consideration.
1.12 Critical Accounting
Estimates
The required disclosure is provided in Note 2 in the notes to
the Interim Financial Statements which accompany this MD&A and which are
available under the Company’s profile at www.sedar.com.
1.13 Changes in Accounting
Policies including Initial Adoption
The required disclosure is provided in Note 2 in the notes to
the Interim Financial Statements which accompany this MD&A and which are
available under the Company’s profile at www.sedar.com.
1.14 Financial Instruments and
Other Instruments
The Company is exposed in varying degrees to a variety of
financial instrument related risks. The Board approves and monitors the risk
management processes, inclusive of documented investment policies, counterparty
limits, and controlling and reporting structures. The type of risk exposure and
the way in which such exposure is managed is provided as follows:
Page | 24
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
Credit Risk
Credit risk is the risk of potential loss to the Company if a
counterparty to a financial instrument fails to meet its contractual
obligations. The Company’s credit risk is primarily attributable to its liquid
financial assets, including cash and cash equivalents, saving accounts,
guaranteed investment certificates and amounts receivable. The Company limits
the exposure to credit risk by only investing its cash and cash equivalents with
high-credit quality financial institutions in business and saving accounts,
guaranteed investment certificates, and in government treasury bills, which are
available on demand by the Group as and when required or mature in timeframes
appropriate to the needs of the Company. There has been no change in the
Company’s objectives and policies for managing this risk except for changes in
the carrying amounts of financial assets exposed to credit risk, and there was
no significant change to the Company’s exposure to credit risk during the period
ended September 30, 2017. Amounts receivable include receivable balances with
government agencies, prepaid expenses and refundable deposits. Management has
also concluded that there is no objective evidence of impairment to the
Company’s amounts receivable.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to
meet its financial obligations when they become due. There has been no change in
the Company’s objectives and policies for managing this risk. The Company’s
liquidity position is discussed further in Section 1.6
Liquidity.
Foreign Exchange Risk
The Company is subject to both currency transaction risk and
currency translation risk: the Pebble Partnership, Pebble Services Inc. and U5
Resources Inc. have the US dollar as functional currency; and certain of the
Company’s corporate expenses are incurred in US dollars. The fluctuation of the
US dollar in relation to the Canadian dollar has an impact upon the losses
incurred by the Company as well as the value of the Company’s assets and total
shareholders’ equity as the Company’s functional and presentation currency is
the Canadian dollar. The Company has not entered into any agreements or
purchased any instruments to hedge possible currency risks at this time.
There has been no change in the Company’s objectives and
policies for managing this risk, except for the changes in the carrying amounts
of the financial assets exposed to foreign exchange risk. During the nine months
to September 30, 2017, the Company completed a bought deal financing in US
dollars (refer 1.2.2
Financing) and has recognized additional
legal fees payable in US dollars and as a result the Company’s exposure to
foreign exchange risk, expressed in thousands, has increased as follows:
Page | 25
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
| |
|
September 30 |
|
|
December 31 |
|
| US dollar
denominated financial assets and liabilities |
|
2017 |
|
|
2016 |
|
| Financial assets: |
|
|
|
|
|
|
| Held-to-maturity investments |
$ |
5,586 |
|
$ |
– |
|
| Amounts receivable |
|
207 |
|
|
326 |
|
| Restricted Cash |
|
748 |
|
|
– |
|
|
Cash and cash equivalents |
|
25,018 |
|
|
2,232 |
|
| |
|
31,559 |
|
|
2,558 |
|
| Financial liabilities: |
|
|
|
|
|
|
| Long term payables |
|
(13,192 |
) |
|
– |
|
| Payables to related parties |
|
– |
|
|
– |
|
|
Trade and other payables |
|
(13,129 |
) |
|
(652 |
) |
| |
|
(26,321 |
) |
|
(652 |
) |
| Net financial
assets exposed to foreign currency risk |
$ |
5,238 |
|
$ |
1,906 |
|
Based on the above net exposures and assuming that all other
variables remain constant, a 10% change in the value of the Canadian dollar
relative to the US dollar would result in a gain or loss, expressed in
thousands, of $524 (December 31, 2016 – $191) in the period reported. This
sensitivity analysis includes only outstanding foreign currency denominated
monetary items.
Interest rate risk
The Company is subject to interest rate risk with respect to
its investments in cash and cash equivalents. There has been no change in the
Company’s objectives and policies for managing this risk and no significant
change to the Company’s exposure to interest rate risk during the period ended
September 30, 2017.
Commodity price risk
While the value of the Company’s Pebble Project is related to
the price of copper, gold, molybdenum and silver and the outlook for these
minerals, the Company currently does not have any operating mines and hence does
not have any hedging or other commodity based risks in respect of its
operational activities.
Copper, gold, molybdenum and silver prices have fluctuated
widely historically and are affected by numerous factors outside of the
Company’s control, including, but not limited to, industrial and retail demand,
central bank lending, forward sales by producers and speculators, levels of
worldwide production, short-term changes in supply and demand because of
speculative hedging activities, and certain other factors related specifically
to gold.
Capital Management
The Company’s policy is to maintain a strong capital base so as
to maintain investor and creditor confidence and to sustain future development
of the business. The capital structure of the Company currently consists of
equity, comprising share capital and reserves, net of accumulated deficit.
There were no changes in the Company’s approach to capital
management during the period. The Company is not subject to any externally
imposed capital requirements.
Page | 26
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
1.15 Other MD&A Requirements
Additional information relating to the Company, including the
Company’s 2016 Annual Information Form, is available under the Company’s profile
on SEDAR at www.sedar.com.
1.15.1 Disclosure of Outstanding Share Data
The capital structure of the Company as of November 8, 2017, is
shown in the following table:
| |
|
Number |
|
| Common shares issued and outstanding |
|
304,671,559 |
|
| Share options pursuant to the Company’s incentive plan |
|
19,867,431 |
|
| Deferred share units |
|
458,129 |
|
| Restricted share units |
|
506,495 |
|
| Warrants and non-incentive plan options1 |
|
38,837,856 |
|
| Note to table: |
| 1. |
Non-incentive plan options were issued on the acquisition
of Cannon Point in October 2015. Warrants were issued pursuant to the
acquisition of Mission Gold in December 2015, the prospectus financing in
June 2016 and the private placement in July 2016. |
1.15.2 Disclosure Controls and Procedures
The Company has disclosure controls and procedures in place to
provide reasonable assurance that any information required to be disclosed by
the Company under securities legislation is recorded, processed, summarized and
reported within the applicable time periods and that required information is
gathered and communicated to the Company's management so that decisions can be
made about timely disclosure of that information.
1.15.3 Management’s Report on Internal Control over
Financial Reporting
The Company's management, including the CEO and the CFO, is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting ("ICFR") is a
process designed by, or under the supervision of, the Company's principal
executive and principal financial officers and effected by the Company's Board
of Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in accordance with IFRS.
The Company's ICFR includes those policies and procedures that:
- pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the Company;
- provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with IFRS, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the company; and
- provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the consolidated financial statements.
Page | 27
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
1.15.4 Changes in Internal Control over Financial Reporting
There has been no change in the Company’s ICFR during the three
months ended September 30, 2017, that has materially affected, or is reasonably
likely to materially affect, the Company’s ICFR.
1.15.5 Limitations of Controls and Procedures
The Company’s management, including its CEO and CFO, believe
that any system of disclosure controls and procedures or ICFR, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Furthermore, the
design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, they cannot
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been prevented or detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by unauthorized override of
controls. The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Accordingly, because of the inherent limitations in
a cost effective control system, misstatements due to error or fraud may occur
and not be detected.
Page | 28
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
1.15.6 Risk Factors
The securities of Northern Dynasty are highly speculative and
subject to a number of risks. A prospective investor or other person reviewing
Northern Dynasty for a prospective investor should not consider an investment in
Northern Dynasty unless the investor is capable of sustaining an economic loss
of their entire investment. The risks associated with Northern Dynasty’s
business include:
Inability to Ultimately Achieve Mine Permitting and Build a
Mine at the Pebble Project.
The Company may ultimately be unable to secure the necessary
permits under United States Federal and Alaskan State laws to build and operate
a mine at the Pebble Project. There is no assurance that the EPA will not seek
to undertake future regulatory action to impede or restrict the Pebble Project.
In addition, there are prominent and well organized opponents of the Pebble
Project and the Company may be unable, even if we present solid scientific and
technical evidence of risk mitigation, to overcome such opposition and convince
governmental authorities that a mine should be permitted at the Pebble Project.
The Company faces not only the permitting and regulatory issues typical of
companies seeking to build a mine, but additional public and regulatory scrutiny
due to its location and likely size. Accordingly, there is no assurance that the
Company will obtain the required permits. In the ordinary course, the Company’s
permitting process will involve filing CWA 404 permit applications with the US
Army Corps of Engineers, which will trigger an EIS process under NEPA. The EIS
process under NEPA, and the requirement for the Company to secure a broad range
of other permits and authorizations from multiple federal and state regulatory
agencies will take several years. After all permits necessary to begin
construction are in hand, a number of years would be required to finance and
build a mine and commence operations. During these periods, the Company would
likely have no income and so would require additional financing to continue its
operations. Unless and until we build a mine at the Pebble Project we will be
unable to achieve revenues from operations and may not be able to sell or
otherwise recover our investment in the Pebble Project, which would have a
material adverse effect on the Company and an investment in the Company’s common
shares.
Negative Operating Cash Flow
The Company currently has a negative operating cash flow and
will continue to have that for the foreseeable future. Accordingly, the Company
will require substantial additional capital in order to fund its future
exploration and development activities. The Company does not have any
arrangements in place for this funding and there is no assurance that such
funding will be achieved when required. Any failure to obtain additional
financing or failure to achieve profitability and positive operating cash flows
will have a material adverse effect on its financial condition and results of
operations.
Risk of Secure Title or Property Interest
There can be no certainty that title to any property interest
acquired by the Company or any of its subsidiaries is without defects. Although
the Company has taken reasonable precautions to ensure that legal title to its
properties is properly documented, there can be no assurance that its property
interests may not be challenged or impugned. Such property interests may be
subject to prior unregistered agreements or transfers or other land claims, and
title may be affected by undetected defects and adverse laws and regulations.
The Pebble Partnership’s mineral concessions at Pebble are
located on State of Alaska lands specifically designated for mineral exploration
and development. Alaska is a stable jurisdiction with a well-developed
regulatory and legal framework for resource development and public lands
management, a strong commitment to the rule of law and lengthy track record for
encouraging investment in the development if its land and natural resources.
Page | 29
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
The Pebble Project is Subject to Political and Environmental
Regulatory Opposition
As is typical for a large scale mining project, the Pebble
Project faces organized opposition from certain individuals and organizations
who are motivated to preclude any possible mining in the Bristol Bay Watershed
(the "BBW"). The BBW is an important wildlife and salmon habitat area.
Accordingly, one of the greatest risks to the Pebble Project is seen to be
political/permitting risk which may ultimately preclude construction of a mine
at the Pebble Project. Opposition may include legal challenges to exploration
and development permits, which may delay or halt development. Other tactics may
also be employed by opposition groups to delay or frustrate development at
Pebble, included political and public advocacy, electoral strategies, media and
public outreach campaigns and protest activity.
The Pebble Partnership’s Mineral Property Interests Do Not
Contain Any Ore Reserves or Any Known Body of Economic Mineralization
Although there are known bodies of mineralization on the Pebble
Project, and the Pebble Partnership has completed core drilling programs within,
and adjacent to, the deposits to determine measured and indicated resources,
there are currently no known reserves or body of commercially viable ore and the
Pebble Project must be considered an exploration and feasibility evaluation
project only. Extensive additional work is required before Northern Dynasty or
the Pebble Partnership can ascertain if any mineralization may be economic and
hence constitute “ore”.
Mineral Resources Disclosed by Northern Dynasty or the
Pebble Partnership for the Pebble Project are Estimates Only
Northern Dynasty has included mineral resource estimates that
have been made in accordance with NI 43-101. These resource estimates are
classified as "measured resources", "indicated resources" and "inferred
resources". Northern Dynasty advises investors that while these terms are
mandated by Canadian securities administrators, the SEC does not recognize these
terms. Investors are cautioned not to assume that any part or all of mineral
deposits classified as "measured resources" or "indicated resources" will ever
be converted into ore reserves. Further, "inferred resources" have a great
amount of uncertainty as to their existence, and economic and legal feasibility.
It cannot be assumed that all or any part of an inferred mineral resource will
ever be upgraded to a higher category. Under Canadian rules, estimates of
inferred mineral resources may not form the basis of feasibility or
prefeasibility studies, except in rare cases. Investors are cautioned not to
assume that part or all of an inferred resource exists, or is economically or
legally mineable.
All amounts of mineral resources are estimates only, and
Northern Dynasty cannot be certain that any specified level of recovery of
metals from the mineralized material will in fact be realized or that the Pebble
Project or any other identified mineral deposit will ever qualify as a
commercially mineable (or viable) ore body that can be economically exploited.
Mineralized material which is not mineral reserves does not have demonstrated
economic viability. In addition, the quantity of mineral reserves and mineral
resources may vary depending on, among other things, metal prices and actual
results of mining. There can be no assurance that any future economic or
technical assessments undertaken by the Company with respect to the Pebble
Project will demonstrate positive economics or feasibility.
Northern Dynasty Has No History of Earnings and No
Foreseeable Earnings, and May Never Achieve Profitability or Pay
Dividends
Northern Dynasty has only had losses since inception and there
can be no assurance that Northern Dynasty will ever be profitable. Northern
Dynasty has paid no dividends on its shares since incorporation. Northern
Dynasty presently has no ability to generate earnings as its mineral properties
are in the pre-development stage.
Page | 30
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
Northern Dynasty’s Consolidated Financial Statements have
been Prepared Assuming Northern Dynasty will Continue on a Going Concern Basis
Northern Dynasty’s Interim Financial Statements have been
prepared on the basis that Northern Dynasty will continue as a going concern. At
September 30, 2017, Northern Dynasty had working capital of $25.4 million.
Northern Dynasty has prioritized the allocation of available financial resources
in order to meet key corporate and Pebble Project expenditure requirements for
the remainder of 2017 and have available financial resources to carry forward
into the first quarter of 2018. Additional financing will be required for
continued corporate expenditures and material expenditures at the Pebble
Project. Northern Dynasty’s continuing operations and the underlying value and
recoverability of the amounts shown for mineral property interest are entirely
dependent upon the existence of economically recoverable mineral reserves at the
Pebble Project, the ability of the Company to finance its operating costs, the
completion of the exploration and development of the Pebble Project, the Pebble
Partnership obtaining the necessary permits to mine, and on future profitable
production at the Pebble Project. Furthermore, failure to continue as a going
concern would require that Northern Dynasty's assets and liabilities be restated
on a liquidation basis, which would likely differ significantly from their going
concern assumption carrying values. Refer also to discussion in 1.6 Liquidity.
As the Pebble Project is Northern Dynasty’s only Mineral
Property Interest, the Failure to Establish that the Pebble Project Possesses
Commercially Viable and Legally Mineable Deposits of Ore may cause a Significant
Decline in the Trading Price of Northern Dynasty’s Common Shares and Reduce its
ability to obtain New Financing
The Pebble Project is, through the Pebble Partnership, Northern
Dynasty’s only mineral project. Northern Dynasty’s principal business objective
is to carry out further exploration and related activities to establish whether
the Pebble Project possesses commercially viable deposits of ore. If Northern
Dynasty is not successful in its plan of operations, Northern Dynasty may have
to seek a new mineral property to explore or acquire an interest in a new
mineral property or project. Northern Dynasty anticipates that such an outcome
would adversely impact the price of Northern Dynasty’s common shares.
Furthermore, Northern Dynasty anticipates that its ability to raise additional
financing to fund exploration of a new property or the acquisition of a new
property or project would be impaired as a result of the failure to establish
commercial viability of the Pebble Project.
If prices for copper, gold, molybdenum and silver decline,
Northern Dynasty may not be able to raise the additional financing required to
fund expenditures for the Pebble Project
The ability of Northern Dynasty to raise financing to fund the
Pebble Project, will be significantly affected by changes in the market price of
the metals for which it explores. The prices of copper, gold, molybdenum and
silver are volatile, and are affected by numerous factors beyond Northern
Dynasty’s control. The level of interest rates, the rate of inflation, the world
supplies of and demands for copper, gold, molybdenum and silver and the
stability of exchange rates can all cause fluctuations in these prices. Such
external economic factors are influenced by changes in international investment
patterns and monetary systems and political developments. The prices of copper,
gold, molybdenum and silver have fluctuated in recent years, and future
significant price declines could cause investors to be unprepared to finance
exploration of copper, gold, molybdenum and silver, with the result that
Northern Dynasty may not have sufficient financing with which to fund its
exploration activities.
Mining is Inherently Dangerous and Subject to Conditions or
Events Beyond the Company’s Control, which Could have a Material Adverse Effect
on the Company’s Business
Hazards such as fire, explosion, floods, structural collapses,
industrial accidents, unusual or unexpected geological conditions, ground
control problems, power outages, inclement weather, seismic activity, cave-ins
and mechanical equipment failure are inherent risks in the Company’s
exploration, development and mining operations. These and other hazards may
cause injuries or death to employees, contractors or other persons at the
Company’s mineral properties, severe damage to and destruction of the Company’s
property, plant and equipment and mineral properties, and contamination of, or
damage to, the environment, and may result in the suspension of the Company’s
exploration and development activities and any future production activities. Safety measures implemented by the Company may not be
successful in preventing or mitigating future accidents.
Page | 31
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
Northern Dynasty Competes with Larger, Better Capitalized
Competitors in the Mining Industry
The mining industry is competitive in all of its phases,
including financing, technical resources, personnel and property acquisition. It
requires significant capital, technical resources, personnel and operational
experience to effectively compete in the mining industry. Because of the high
costs associated with exploration, the expertise required to analyze a project’s
potential and the capital required to develop a mine, larger companies with
significant resources may have a competitive advantage over Northern Dynasty.
Northern Dynasty faces strong competition from other mining companies, some with
greater financial resources, operational experience and technical capabilities
than Northern Dynasty possesses. As a result of this competition, Northern
Dynasty may be unable to maintain or acquire financing, personnel, technical
resources or attractive mining properties on terms Northern Dynasty considers
acceptable or at all.
Compliance with Environmental Requirements will take
Considerable Resources and Changes to these Requirements could Significantly
Increase the Costs of Developing the Pebble Project and Could Delay These
Activities
Northern Dynasty and the Pebble Partnership must comply with
stringent environmental legislation in carrying out work on the Pebble Project.
Environmental legislation is evolving in a manner that will require stricter
standards and enforcement, increased fines and penalties for non-compliance,
more stringent environmental assessments of proposed projects and a heightened
degree of responsibility for companies and their officers, directors and
employees. Changes in environmental legislation could increase the cost to the
Pebble Partnership of carrying out its exploration and, if warranted,
development of the Pebble Project. Further, compliance with new or additional
environmental legislation may result in delays to the exploration and, if
warranted, development activities.
Changes in Government Regulations or the Application thereof
and the Presence of Unknown Environmental Hazards on Northern Dynasty’s Mineral
Properties May Result in Significant Unanticipated Compliance and Reclamation
Costs
Government regulations relating to mineral rights tenure,
permission to disturb areas and the right to operate can adversely affect
Northern Dynasty. Northern Dynasty and the Pebble Partnership may not be able to
obtain all necessary licenses and permits that may be required to carry out
exploration at our projects. Obtaining the necessary governmental permits is a
complex, time-consuming and costly process. The duration and success of efforts
to obtain permits are contingent upon many variables not within our control.
Obtaining environmental permits may increase costs and cause delays depending on
the nature of the activity to be permitted and the interpretation of applicable
requirements implemented by the permitting authority. There can be no assurance
that all necessary approvals and permits will be obtained and, if obtained, that
the costs involved will not exceed those that we previously estimated. It is
possible that the costs and delays associated with the compliance with such
standards and regulations could become such that we would not proceed with the
development or operation of a mine at the Pebble Project. Refer to further
discussion in 1.2.1.3
LegalMatters.
Page | 32
| Northern Dynasty Minerals Ltd. |
| Management's Discussion And Analysis |
| Three and Nine months ended September 30, 2017 |
| |
Litigation
The Company was until recently, and may in future be subject to
legal proceedings, including with regard to actions discussed in Other
Matters in 1.2.1.3 Legal
Matters in the pursuit of its Pebble Project.
Given the uncertain nature of these actions, the Company cannot reasonably
predict the outcome thereof. If the Company is unable to resolve these matters
favorably, it will likely have a material adverse effect of the Company.
Northern Dynasty is Subject to Many Risks that are Not
Insurable and, as a Result, Northern Dynasty will Not Be Able to Recover Losses
through Insurance Should Such Certain Events Occur
Hazards such as unusual or unexpected geological formations and
other conditions are involved in mineral exploration and development. Northern
Dynasty may become subject to liability for pollution, cave-ins or hazards
against which it cannot insure. The payment of such liabilities could result in
increase in Northern Dynasty’s operating expenses which could, in turn, have a
material adverse effect on Northern Dynasty’s financial position and its results
of operations. Although Northern Dynasty and the Pebble Partnership maintain
liability insurance in an amount which we consider adequate, the nature of these
risks is such that the liabilities might exceed policy limits, the liabilities
and hazards might not be insurable against, or Northern Dynasty and the Pebble
Partnership might elect not to insure itself against such liabilities due to
high premium costs or other reasons, in which event Northern Dynasty could incur
significant liabilities and costs that could materially increase Northern
Dynasty’s operating expenses.
If Northern Dynasty Loses the Services of the Key Personnel
that it Engages to Undertake its Activities, then Northern Dynasty’s Plan of
Operations May Be Delayed or be More Expensive to Undertake than Anticipated
Northern Dynasty’s success depends to a significant extent on
the performance and continued service of certain independent contractors,
including HDSI (refer 1.9 Transactions with Related
Parties). The Company has access to the full
resources of HDSI, an experienced exploration and development firm with in-house
geologists, engineers and environmental specialists, to assist in its technical
review of the Pebble Project. There can be no assurance that the services of all
necessary key personnel will be available when required or if obtained, that the
costs involved will not exceed those that we previously estimated. It is
possible that the costs and delays associated with the loss of services of key
personnel could become such that we would not proceed with the development or
operation of a mine at the Pebble Project.
The Market Price of Northern Dynasty’s Common Shares is
Subject to High Volatility and Could Cause Investor Loss.
The market price of a publicly traded stock, especially a
resource issuer like Northern Dynasty, is affected by many variables in addition
to those directly related to exploration successes or failures. Such factors
include the general condition of markets for resource stocks, the strength of
the economy generally, the availability and attractiveness of alternative
investments, and the breadth of the public markets for the stock. The effect of
these and other factors on the market price of the Company’s common shares
suggests Northern Dynasty’s shares will continue to be volatile. Therefore,
investors could suffer significant losses if Northern Dynasty’s shares are
depressed or illiquid when an investor needs to sell Northern Dynasty shares.
Northern Dynasty Will Require Additional Funding to Meet the
Development Objectives of the Pebble Project.
Northern Dynasty will need to raise additional financing
(through share issuances, debt or asset level partnering) to achieve permitting
and development of the Pebble Project. In addition, a positive production
decision at the Pebble Project would require significant capital for project
engineering and construction. Accordingly, the continuing development of the
Pebble Project will depend upon Northern Dynasty’s ability to obtain financing
through debt financing, equity financing, the joint venturing of the project, or
other means. There can be no assurance that Northern Dynasty will be successful
in obtaining the required financing, or that it will be able to raise the funds
on terms that do not result in high levels of dilution to shareholders.
Page | 33
