The below is excerpted from an article on The Motley Fool blog. Click here to see the full post.
There's one common theme for these companies: losses, losses, and more losses.
Feb 28, 2017 at 7:31AM
The stock market is, for lack of a better word, imperfect. While we as investors would love for things to be entirely rational (for example, earnings growth translating into orderly stock-buying and the subsequent appreciation of stock valuations), that's not always what happens.
A number of factors, including emotions and even X factors that can't be foreseen ahead of time, can influence stock valuations. Sometimes these ancillary factors can push stock valuations exceptionally low, which presents an intriguing buying opportunity for Wall Street and investors. On the other side of the coin, emotions and X factors can also push stock valuations into the stratosphere, well beyond the point where any rational fundamental theorist would dare go. At any given time, there are almost always going to be a few stocks that fall into the latter category of being ludicrously overvalued.
Though valuation is an entirely arbitrary process for each investor, the following three companies stand out for their frightening valuations compared to what they bring to the table.
Northern Dynasty Minerals Ltd.
Just because a stock has a small-cap valuation doesn't mean it can't still be ludicrously overvalued. Next on the list is highly volatile developmental-stage mining company Northern Dynasty Minerals (NYSEMKT:NAK).
In recent months, Northern Dynasty Minerals' shares have caught fire with the expectation that the Trump administration would ease rules set in place by the Environment Protection Agency, possibly allowing the company to be permitted for the Pebble Project in Alaska. In theory, Pebble has enough assets in the ground to keep a mining company busy for upwards of 100 years. Gold and silver prices are also up nicely over the past two months.
Unfortunately, Northern Dynasty's dream of development seems to be more of a fairy tale. One of the bigger issues with Pebble is that the inferred assets in the ground are spread out. While abundant, many of these assets just haven't appeared to be economically feasible to recover. What's more, Northern Dynasty has already spent hundreds of millions just to get to the point where it's trying to determine if there are economically viable areas to mine in Pebble. Don't believe me? Here's a direct statement from the company's third-quarter report:
The Group's continuing operations and underlying value and recoverability of the amount shown for the Group's mineral property interests, is entirely dependent upon the existence of economically recoverable mineral reserves.
Making matters worse, Northern Dynasty Minerals has nowhere near the capitalization required to develop Pebble into a commercially viable operation (assuming recovery is even economically feasible). At the end of the third quarter, the company had less than $6 million in cash and cash equivalents left, although it did generate more than $32 million from a secondary offering in January 2017. Even so, this is laughably far off from the years and billions of dollars it would seemingly take to get Pebble up to commercial production.
Having been previously abandoned before by companies with pocketbooks that were far deeper than Northern Dynasty Minerals', Pebble is likely a dead duck, and Northern Dynasty's stock is potentially worthless.
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