CONDENSED CONSOLIDATED INTERIM

FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2024 AND 2023

(Expressed in thousands of Canadian Dollars)

(Unaudited)

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In accordance with National Instrument 51-102 Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of these condensed consolidated interim financial statements they must be accompanied by a notice indicating that the condensed consolidated interim financial statements have not been reviewed by an auditor.

The accompanying unaudited condensed consolidated interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

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Northern Dynasty Minerals Ltd.

Condensed Consolidated Interim Statements of Financial Position

(Unaudited - Expressed in thousands of Canadian Dollars)

ASSETS

Non-current assets

Restricted Cash

$

Mineral property, plant and equipment

Total non-current assets

Current assets

Receivable from related party

Amounts receivable and prepaid expenses

Cash and cash equivalents

Total current assets

Total Assets

$

EQUITY

Capital and reserves

Share capital

$

Reserves

Deficit

Total equity

LIABILITIES

Non-current liabilities

Trade and other payables

Total non-current liabilities

Current liabilities

Convertible notes liability

Derivative on convertible notes

Payables to related parties

Trade and other payables

Total current liabilities

Total liabilities

Total Equity and Liabilities

$

Nature and continuance of operations (note 1)

Commitments and contingencies (note 14)

Events after the reporting period (note 15)

The accompanying notes are an integral part of these condensed consolidated interim financial statements. 

These condensed consolidated interim financial statements are signed on the Company's behalf by:

/s/ Ronald W. Thiessen

/s/ Christian Milau

Ronald W. Thiessen

Christian Milau

Director

Director

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Northern Dynasty Minerals Ltd.

Condensed Consolidated Interim Statements of Comprehensive Loss

(Unaudited - Expressed in thousands of Canadian Dollars, except for share information)

Expenses

Exploration and evaluation expenses

General and administrative expenses

Legal, accounting and audit

Share-based compensation

Loss from operating activities

Foreign exchange income

Interest income

Finance expense

Other income

(Gain) loss on change in fair value of convertible notes derivative

Net loss

Other comprehensive (income) loss

Items that may be subsequently reclassified to net loss

Foreign exchange translation difference

Other comprehensive (income) loss

Total comprehensive loss

Basic and diluted loss per share

The accompanying notes are an integral part of these condensed consolidated interim financial statements. 

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Northern Dynasty Minerals Ltd.

Condensed Consolidated Interim Statements of Cash Flows

(Unaudited - Expressed in thousands of Canadian Dollars)

Operating activities

Net loss

Non-cash or non operating items

Depreciation

Interest income

Loss on change in fair value of convertible notes derivative

Share-based compensation

Unrealized exchange gain

Changes in working capital items

Amounts receivable and prepaid expenses

Amounts receivable from related party

Trade and other payables

Payables to related parties

Net cash used in operating activities

Investing activities

Disposal of plant and equipment

Interest received on cash and cash equivalents

Net cash from investing activities

Financing activities

Payments of principal portion of lease liabilities

Net cash used in financing activities

Net decrease in cash and cash equivalents

Effect of exchange rate fluctuations on cash and cash equivalents

Cash and cash equivalents - beginning balance

Cash and cash equivalents - ending balance

The accompanying notes are an integral part of these condensed consolidated interim financial statements. 

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Northern Dynasty Minerals Ltd.

Condensed Consolidated Interim Statements of Changes in Equity

(Unaudited - Expressed in thousands of  Canadian Dollars, except for share information)

Balance at January 1, 2023

Share-based compensation

Net loss

Other comprehensive loss net of tax

Total comprehensive loss

Balance at June 30, 2023

Balance at January 1, 2024

Shares returned to treasury and cancelled

Share-based compensation

Net loss

Other comprehensive income net of tax

Total comprehensive loss

Balance at June 30, 2024

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Northern Dynasty Minerals Ltd.

Notes to the Condensed Consolidated Interim Financial Statements

For the three and six months ended June 30, 2024, and 2023

(Unaudited - Expressed in thousands of Canadian Dollars, unless otherwise stated, and except per equity unit)

1.

NATURE AND CONTINUANCE OF OPERATIONS

Northern Dynasty Minerals Ltd. (the "Company") is incorporated under the laws of the Province of British Columbia, Canada, and its principal business activity is the exploration of mineral properties. The Company is listed on the Toronto Stock Exchange ("TSX") under the symbol "NDM" and on the NYSE American Exchange ("NYSE American") under the symbol "NAK". The Company’s corporate office is located at 1040 West Georgia Street, 14^th floor, Vancouver, British Columbia.

The condensed consolidated interim financial statements ("Financial Statements") of the Company as at and for the three and six months ended June 30, 2024, include financial information for the Company and its subsidiaries (together referred to as the "Group" and individually as "Group entities"). The Company is the ultimate parent. The Group’s core mineral property interest is the Pebble Copper-Gold-Molybdenum-Silver-Rhenium Project (the "Pebble Project") located in Alaska, United States of America ("USA" or "US"). All US dollar amounts when presented are denoted "US$" and expressed in thousands, unless otherwise stated.

The Group is in the process of exploring and evaluating the Pebble Project and has not yet determined whether the Pebble Project contains mineral reserves that are economically recoverable. The Group’s continuing operations and the underlying value and recoverability of the amounts shown for the Group’s mineral property interests is entirely dependent upon the existence of economically recoverable mineral reserves; the ability of the Group to obtain financing to complete the exploration and development of the Pebble Project; the Group obtaining the necessary permits to mine; and future profitable production or proceeds from the disposition of the Pebble Project.

As of June 30, 2024, the Group had $11,724 (December 31, 2023 – $18,200) in cash and cash equivalents for its operating requirements and a negative working capital (current assets minus current liabilities) of $8,329 (as compared to working capital of $899 at December 31, 2023) as a result of recognizing the Convertible notes liability and derivative in current liabilities (note 7). These Financial Statements have been prepared based on a going concern, which assumes that the Group will be able to raise sufficient funds to continue its exploration and development activities and satisfy its obligations as they come due. During the six months ended June 30, 2024, the Group incurred a net loss of $8,986 (2023 – $13,268) and had a deficit of $705,707 as of June 30, 2024 (December 31, 2023 – $696,958). The Group has prioritized the allocation of its financial resources to meet key corporate and Pebble Project expenditure requirements in the near term, including funding the Group’s response to the US Environmental Protection Agency ("EPA")’s final determination and appeal and remand of the Record of Decision (the "ROD") (both discussed below). Additional financing will be required to progress any material expenditures relating to the permitting of the Pebble Project. Additional financing may include any of or a combination of debt, equity (subject to terms of the Convertible notes (note 7), royalties and/or contributions from possible new Pebble Project participants. The Group received a US$2,000 investment towards the second US$12,000 tranche under to the royalty agreement on execution of an amendment to the royalty agreement in November 2023 (the “Amendment") which provided the royalty holder with the right to fund the remainder of the second tranche in five US$2,000 investments. Subsequent to the reporting period, on July 25, 2024, the Group received the balance of US$10,000 of the second tranche royalty payment (note 15). There can be no assurances that the Group will be successful in obtaining additional financing or funding when required. If the Group is unable to raise the necessary capital resources and generate sufficient cash flows to meet obligations as they come due, the Group may, at some point, consider reducing or curtailing its operations. As a result, there is material uncertainty that raises substantial doubt about the Group’s ability to continue as a going concern.

These Financial Statements do not reflect adjustments to the carrying values and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern, and such adjustments could be material.

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Northern Dynasty Minerals Ltd.

Notes to the Condensed Consolidated Interim Financial Statements

For the three and six months ended June 30, 2024, and 2023

(Unaudited - Expressed in thousands of Canadian Dollars, unless otherwise stated, and except per equity unit)

The Group, through the Pebble Limited Partnership ("Pebble Partnership”), initiated federal and state permitting for the Pebble Project under the National Environmental Protection Act ("NEPA") by filing documentation for a Clean Water Act ("CWA") 404 permit with the US Army Corps of Engineers ("USACE") in December 2017.  The USACE published a draft Environmental Impact Statement ("EIS") in February 2019 and completed a 120-day public comment period thereon on July 2, 2019.  In late July 2019, the EPA withdrew the determination initiated under Section 404(c) of the CWA in 2014 for the waters of Bristol Bay ("Proposed Determination"), which attempted to pre-emptively veto the Pebble Project before it received an objective, scientific regulatory review under NEPA.  On July 24, 2020, the USACE published the final EIS.  On November 25, 2020, the USACE issued a ROD rejecting the Pebble Partnership’s permit application, finding concerns with the proposed compensatory mitigation plan and determining the project would be contrary to the public interest.  The ROD rejected the compensatory mitigation plan as ‘non-compliant’ and determined the project would cause ‘significant degradation’ and was contrary to the public interest.  Based on this finding, the USACE rejected the Pebble Partnership’s permit application under the CWA.  On January 19, 2021, the Pebble Partnership submitted its request for appeal of the ROD with the USACE Pacific Ocean Division ("USACE POD") (the "RFA").  On February 24, 2021, the USACE POD notified the Pebble Partnership that the RFA was complete and met the criteria for appeal and assigned a review officer ("RO") to oversee the administrative appeal process at that time but subsequently assigned a new RO.  The USACE POD also indicated that due to the complexity of issues and volume of materials associated with the Pebble Project case, the review would take additional time than what federal regulations suggest, which was that the appeal should conclude within 90 days, and no case extend beyond one year.  In June 2021, the USACE POD completed the ‘administrative record’ for the appeal and provided a copy to the Pebble Partnership, following which the Pebble Partnership and its legal counsel reviewed the voluminous record for completeness and relevance to the USACE’s permitting decision, and its sufficiency to support a fair, transparent, and efficient review.  An appeal conference was held in July 2022.  On April 24, 2023, the USACE POD issued its decision to remand the permit application denial to the USACE Alaska District (the "District") so the District can re-evaluate specific issues.  As a result of the remand decision and in light of the EPA’s Final Determination (discussed below), the District was instructed to review the appeal decision and had 45 days to notify the parties how it plans to proceed.  Six extensions were requested and granted.  The District’s last extension was until the US Supreme Court acted on the State of Alaska’s bill of complaint challenging the EPA’s exercise of its CWA, Section 404(c) authority.  On January 8, 2024, the US Supreme Court announced they would not hear the State’s complaint directly and it would have to go through the normal US federal court process.  In April 2024, the District advised that, after months of successive delays, it has declined to engage in the remand process related to the November 25, 2020, denial of a permit application for the Pebble Project, citing the EPA’s intervening veto of the development at Pebble.  In determining not to engage in the remand process, the District issued a further record of decision dated April 15, 2024, to deny the permit on the basis that the Pebble Project and portions of the required transportation and pipeline corridor fall within the "defined areas for prohibition" and the "defined area for restriction" in the EPA’s Final Determination.  The further denial was stated by the District to be without prejudice and not subject to administrative appeal on the basis that the EPA’s Final Determination is a controlling factor that cannot be changed by a District decision maker.  The District’s further determination is not based on the merits of the many technical issues raised in the Company’s appeal and is viewed by the Company as prejudicial to the Company and the Pebble Partnership as the EPA’s Final Determination is based on, in part, the findings of the District.  

On October 29, 2021, the court granted the EPA’s motion for remand, and vacated the EPA’s 2019 withdrawal of the Proposed Determination decision, thus reinstating the Proposed Determination. The court declined to impose a schedule on the EPA’s proceedings on remand. On May 25, 2022, the EPA announced that it intended to advance its pre-emptive veto of the Pebble Project and issued a revised Proposed Determination. Public comments on the revised Proposed Determination closed on September 6, 2022. The Pebble Partnership submitted extensive comments on the Revised Proposed Determination, objecting to the EPA’s pre-emptive veto of the Pebble Project and stating its concerns about legal and factual flaws therein. On January 30, 2023, the EPA issued a Final Determination under Section 404(c) of the CWA, imposing limitations on the use of certain waters in the Bristol Bay watershed as disposal sites for certain discharges of dredged or fill material associated with development of a mine at the Pebble deposit. This Final Determination is the concluding step in the administrative process set forth in 40 C.F.R. Part 231, which governs the EPA’s authority under Section 404(c) to veto permit decisions. The Administrative Procedure Act ("APA"), 5 USC §551 et seq., which governs judicial review of agency decisions, provides that individuals aggrieved by agency action may seek judicial review of any "final agency action." The EPA’s administrative determination can be challenged by filing a lawsuit in US federal district court seeking reversal of that decision.  

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Northern Dynasty Minerals Ltd.

Notes to the Condensed Consolidated Interim Financial Statements

For the three and six months ended June 30, 2024, and 2023

(Unaudited - Expressed in thousands of Canadian Dollars, unless otherwise stated, and except per equity unit)

The Company and the Pebble Partnership are seeking judicial review of the Final Determination. On March 15, 2024, the Company announced that two separate actions had been filed in the US federal courts challenging the federal government’s actions to prevent it and the Pebble Partnership from building a mine at the Pebble Project. One action, filed in Federal District Court in Alaska, seeks to vacate the EPA’s Final Determination to veto a development at Pebble.

On June 7, 2024, the Company and the Pebble Partnership filed a further motion for leave to file an amended complaint in Federal District Court in Alaska to reverse the District decision to deny the project a permit.  The principal purpose of the amended complaint is to add the District as a defendant.  The Company’s amended complaint claims that the District’s reasoning was arbitrary and capricious, and that the District’s initial permit denial, which informed the EPA’s Final Determination, was flawed in ways that the District itself subsequently acknowledged, including (i) that the project might damage the Bristol Bay fishery when the District's scientific review set forth in the final EIS had found just the opposite, and (ii) that there was risk of a catastrophic failure of the tailings facility when the final EIS concluded the opposite.  The Company claims that the District’s refusal to proceed with the remand process is contradictory and prejudicial to the Company and the Pebble Partnership as the EPA’s Final Determination is based on the District’s conclusions which are, in part, required to be the reviewed under the remand process.

The State of Alaska filed a "takings" action in the US Court of Federal Claims in Washington, DC, in March 2024. The State of Alaska filed an action in Federal District Court in Alaska seeking to vacate the EPA veto of a development at Pebble in April 2024.

In June 2024, Iliamna Natives Limited ("INL"”) and Alaska Peninsula Corporation ("APC") filed suit against the EPA for exceeding its authority with the veto action against Pebble. Both INL and APC are Alaska Native Village corporations representing two of the communities closest to the Pebble Project.

2.

MATERIAL ACCOUNTING POLICIES

(a)

Statement of Compliance

These Financial Statements have been prepared in accordance with IAS 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB") and interpretations issued by the IFRS Interpretations Committee ("IFRIC"s). They do not include all of the information required by IFRS for complete annual financial statements and should be read in conjunction with the Group’s consolidated financial statements as at and for the year ended December 31, 2023 (the "2023 annual financial statements"). These Financial Statements were authorized for issue by the Audit and Risk Committee on August 12, 2024.

(b)

Significant Accounting Estimates and Judgements

In preparing these Financial Statements, management has made judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

There was no change in the use of significant estimates and judgements during the current period as compared to those described in Note 2 in the 2023 annual financial statements, and which three are discussed below:

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Northern Dynasty Minerals Ltd.

Notes to the Condensed Consolidated Interim Financial Statements

For the three and six months ended June 30, 2024, and 2023

(Unaudited - Expressed in thousands of Canadian Dollars, unless otherwise stated, and except per equity unit)

Critical accounting judgements

1.  

·

The Group submitted an administrative appeal with the USACE POD on the permit denial and the USACE POD remanded the permit decision to the District to re-evaluate specific issues. Although the District has declined to engage in the remand process, citing the EPA intervening veto of development at Pebble, this decision is without prejudice and not based on the merits of the many technical issues raised in the Group’s appeal. The Group has also filed a motion to amend its complaint against the EPA to include the District as a defendant;

·

·

2.

The Group used judgement that going concern is an appropriate basis for the preparation of the Financial Statements, as the Group considered existing financial resources in determining that such financial resources can meet key corporate and Pebble Project expenditure requirements for at least the next twelve months (note 1).

3.

The Group used judgement in concluding that the convertible notes are hybrid financial instruments because of the embedded derivative liability that is the foreign exchange equity conversion i.e., the Group can issue a fixed number of the Company’s shares for a variable amount depending on the US$/C$ exchange rate.

(c)

Recent Accounting Pronouncements

Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB. The following was adopted by the Group on January 1, 2024:

·

IFRS 16, Sale and Leaseback Transactions: In September 2022, the IASB issued amendments to IFRS 16, Leases, which add requirements explaining how to account for a sale and leaseback after the date of the transaction. The amendments are effective for annual reporting periods beginning on or after January 1, 2024. Earlier application is permitted. The adoption had no impact on the Financial Statements as the Group did not incur any of these transactions in the reporting period.

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Northern Dynasty Minerals Ltd.

Notes to the Condensed Consolidated Interim Financial Statements

For the three and six months ended June 30, 2024, and 2023

(Unaudited - Expressed in thousands of Canadian Dollars, unless otherwise stated, and except per equity unit)

3.

MINERAL PROPERTY, PLANT AND EQUIPMENT

The Group’s exploration and evaluation assets are comprised of the following:

Six months ended June 30, 2024

Cost

Beginning balance

Modification of lease term

Ending balance

Accumulated depreciation

Beginning balance

Depreciation charge for the period ³

Ending balance

Foreign currency translation difference

Beginning balance

Movement for the period

Ending balance

Net carrying value – December 31, 2023

Net carrying value – June 30, 2024

Notes to table: 

1.

Mineral Property Interest

Comprises the Pebble Project, a contiguous block of 1,840 mineral claims covering approximately 274 square miles located in southwest Alaska, 17 miles (30 kilometers) from the villages of Iliamna and Newhalen, and approximately 200 miles (320 kilometers) southwest of the city of Anchorage. 

2. 

Plant and Equipment include Right-of-Use Assets (“ROU Assets”)

ROU Assets, which relate to the use of office space, office equipment and yard storage are included under plant and equipment.  The following comprises ROU Assets: 

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Northern Dynasty Minerals Ltd.

Notes to the Condensed Consolidated Interim Financial Statements

For the three and six months ended June 30, 2024, and 2023

(Unaudited - Expressed in thousands of Canadian Dollars, unless otherwise stated, and except per equity unit)

Six months ended June 30, 2024

Cost

Beginning balance

Modification of lease term

Ending balance

Accumulated depreciation

Beginning balance

Depreciation charge for the period ³

Ending balance

Foreign currency translation difference

Beginning balance

Movement for the period

Ending balance

Net carrying value – December 31, 2023

Net carrying value – June 30, 2024

3.

For the three months ended June 30, 2024, total depreciation was $39 (2023 – $41) of which ROU Asset depreciation was $39 (2023 – $37). For the six months ended June 30, 2024, total depreciation was $80 (2023 – $82) of which ROU Asset depreciation was $77 (2023 – $74). ROU Asset depreciation of $26 (2023 – $25) and $52 (2023 - $50) for the three and six months ended June 30, 2024, respectively, is included in general and administrative expenses (note 10(b)). The remainder of the depreciation is included in exploration and evaluation expenses.

4.

AMOUNTS RECEIVABLE AND PREPAID EXPENSES

Sales tax receivable

Interest, refundable deposits, and other receivables ¹

Prepaid expenses ²

Total

Notes to table:

1.

At December 31, 2023, includes the Group’s insurance carrier’s reimbursement of $532 of legal costs incurred on class actions and the Alaska Grand Jury investigation (note 14(a)).

2.

Includes prepaid insurance, which is amortized over the insurance term.

5.

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

(a)

Cash and Cash Equivalents

The Group’s cash and cash equivalents at June 30, 2024 and December 31, 2023, consisted of cash on hand and was invested in business and savings accounts.

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Northern Dynasty Minerals Ltd.

Notes to the Condensed Consolidated Interim Financial Statements

For the three and six months ended June 30, 2024, and 2023

(Unaudited - Expressed in thousands of Canadian Dollars, unless otherwise stated, and except per equity unit)

(b)

Restricted Cash

The Group has cash deposited with a United States financial institution that has been pledged as collateral to the surety provider for a US$2,000 surety bond that was placed with the Alaskan regulatory authorities for a performance guarantee related to any potential reclamation liability as a condition of the Miscellaneous Land Use Permit granted to the Pebble Partnership for its ongoing activities on the Pebble Project.  The cash deposit will be released once any required reclamation work has been performed and assessed by the Alaskan regulatory authorities.  The cash is invested in a money market fund.  For the three and six months ended June 30, 2024, the Group earned income of $11 (2023 – $9) and $22 (2023 - $18) respectively, which was re-invested.  

6.

CAPITAL AND RESERVES

(a)

Authorized Share Capital

At June 30, 2024, and 2023, authorized share capital consisted of an unlimited number of common shares (“Shares”) with no par value, of which 537,724,281 (2023 – 529,779,388) Shares were issued and fully paid.  

(b)

Options not Issued under the Group’s Incentive Plan and Warrants

Continuity

Balance December 31, 2022, and June 30, 2023

Issued

Balance December 31, 2023, and June 30, 2024

Notes to the table:

1.

The options were issued in exchange for the outstanding options in Cannon Point Resources Ltd. on the acquisition of the company in October 2015. They are all exercisable and have a remaining life of 0.44 (December 31, 2023 – 0.94) years and expire on December 8, 2024.

2.

The warrants were issued pursuant to the unit private placement in December 2023. They have a remaining life of 1.46 (December 31, 2023 – 1.96) years and expire on December 14, 2025.

(c)

Share Purchase Option Compensation Plan

The following reconciles the issued and outstanding options pursuant to the Group’s incentive plan for the three and six months ended June 30, 2024, and 2023:  

Continuity of options

Balance December 31, 2022, and June 30, 2023

Expired

Balance December 31, 2023, and June 30, 2024

For the three months and six months ended June 30, 2024, the Group recognized $nil (2023 – $397) and $nil (2023 – $804) in share-based compensation (“SBC”) for options in the Statement of Comprehensive Loss. 

The following table summarizes information on options outstanding as at the reported dates:  

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Northern Dynasty Minerals Ltd.

Notes to the Condensed Consolidated Interim Financial Statements

For the three and six months ended June 30, 2024, and 2023

(Unaudited - Expressed in thousands of Canadian Dollars, unless otherwise stated, and except per equity unit)

June 30, 2024

December 31, 2023

Exercise price ($)

Number of options outstanding

Number of options exercisable

Weighted Average Remaining contractual

 life

 (years)

Number of options outstanding

Number of options exercisable

Weighted Average Remaining contractual

 life

 (years)

0.41

11,254,000

11,254,000

3.13

11,254,000

11,254,000

3.63

0.99

6,368,500

6,368,500

0.24

6,368,500

6,368,500

0.74

2.01

6,696,000

6,696,000

1.05

6,696,000

6,696,000

1.55

Total

24,318,500

24,318,500

24,318,500

24,318,500

The weighted average contractual life for options outstanding, which were all exercisable, was 1.80 (December 31, 2023 – 2.30) years per option.    

(d)

Deferred Share Units ("DSUs")

The following reconciles DSUs outstanding for the six months ended June 30, 2024, and 2023:

Continuity of DSUs

Balance December 31, 2022

Granted

Balance June 30, 2023

Granted

Redeemed

Balance December 31, 2023

Granted

Balance June 30, 2024

For the three months and six months ended June 30, 2024, the Group recognized SBC of $7 (2023 – $6) and $12 (2023 - $12) for DSU grants in the Statement of Comprehensive Loss, based on the aggregate market value of Shares on grant date, with a corresponding increase in the equity-settled share payment reserve in equity. 

After the reporting period the Group issued 18,026 DSUs with a fair value of $0.43 per DSU on date of grant (note 8(a)).

(e)

Foreign Currency Translation Reserve

Continuity

Balance December 31, 2022

Loss on translation of foreign subsidiaries

Balance June 30, 2023

Gain on translation of foreign subsidiaries

Balance December 31, 2023

Gain on translation of foreign subsidiaries

Balance June 30, 2024

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Northern Dynasty Minerals Ltd.

Notes to the Condensed Consolidated Interim Financial Statements

For the three and six months ended June 30, 2024, and 2023

(Unaudited - Expressed in thousands of Canadian Dollars, unless otherwise stated, and except per equity unit)

The foreign currency translation reserve represents accumulated exchange differences arising on the translation of the results of operations and net assets of the Group’s subsidiaries with a US dollar functional currency into the Group’s presentation currency, the Canadian dollar. 

7.

CONVERTIBLE NOTES LIABILITY AND DERIVATIVE ON CONVERTIBLE NOTES

In December 2023, pursuant to an investment agreement, an investor, Kopernik Global Investors, LLC, on behalf of its clients (collectively the "Investor"), purchased convertible notes having an aggregate principal amount of US$15 million (the “Notes").  The Notes have a term of 10 years from the date of issuance, being December 18, 2023, and bear interest at a rate of 2.0% per annum, payable in cash semi-annually in arrears on December 31 and June 30 of each year, commencing on June 30, 2024.  The principal amount of the Notes is convertible at any time at the option of the Investor at a per share conversion price of US$0.3557 (the "Conversion Price"), subject to adjustment in certain circumstances (i.e., including a change of control).  If the Group proceeds with an equity financing in the future, the terms of the Notes require that the Group redeem the Notes at 150% of the principal amount of the Notes, in cash or convert at the Conversion Price (the "financing redemption option"), at the election of the Investor, and pay any accrued but unpaid interest in cash.  This financing is subject to customary exclusions for non-financing issuances of the Company’s equity securities.  In addition, the Notes include change of control provisions under which (i) the Investor may elect to convert the Notes concurrent with a change of control transaction at the lower of the fixed Conversion Price and the price per common share implied by the change of control transaction, and (ii) if the Investor does not elect to convert, the Group will be required to offer to repurchase the Notes at 101% of the principal amount ( the "CoC option"), plus accrued but unpaid interest.  

As the amount of the Notes to be settled is a fixed US Dollar amount which when converted back to the Company’s functional currency results in a variable amount of cash (i.e., a variable carrying amount for the financial liability that arise from changes in the USD/CAD exchange rate), the fixed-for-fixed criterion for equity classification is not met.  The conversion option, financing redemption option and the CoC option are derivative liabilities, with their value dependent on the USD/CAD exchange rate and so are embedded derivatives.  The Notes as a result include a debt host, which is accounted for at amortised cost, and the embedded derivatives, which are separated from the debt host and accounted for at fair value with changes in fair value recorded in the Statement of Comprehensive Loss. 

Transaction costs of $196 were incurred on the issue of the Notes of which $22 was allocated to the debt host with the balance recorded in the Statement of Comprehensive Loss. 

As the conversion feature may be exercised by the Investor at any time, the Group does not have the right to defer its settlement for at least twelve months.  Accordingly, the convertible notes liability and derivative on convertible notes are classified as current liabilities in the Statement of Financial Position. 

Convertible notes liability

The debt host has been accounted for at amortised cost with a 30.13% effective interest rate.  The following reconciles movements at the reported dates:

Continuity

Beginning balance

Recognition on issue date

Transaction costs

Interest accretion

Interest payable

Exchange difference

Ending balance

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Northern Dynasty Minerals Ltd.

Notes to the Condensed Consolidated Interim Financial Statements

For the three and six months ended June 30, 2024, and 2023

(Unaudited - Expressed in thousands of Canadian Dollars, unless otherwise stated, and except per equity unit)

Derivative on convertible notes

The following reconciles the movements at the reported dates:

Continuity

Beginning balance

Recognition on issue date

Loss (gain) on change in fair value

Ending balance

The fair value of the conversion option was estimated using the Binomial Option Pricing Model with formulae based on the Cox-Ross-Rubenstein approach with the following inputs and assumptions on each date: 

Input/Assumption

June 30, 2024

December 31, 2023

Share price on valuation date

US$0.31

US$0.32

Volatility

96.4246%

95.4459%

Strike price on conversion

US$0.3557

US$0.3557

Time to expiration

3,458 days

3,640 days

Risk free interest rate

5.323%

5.153%

Dividend Yield

Nil%

Nil%

The estimated value for the conversion option under the model was US$11,643 ($15,929) on June 30, 2024 (December 31, 2023 – US$12,048 ($15,960)).  

For the financing redemption and CoC options, the Group estimated the discounted cash flow ("DCF") value of the options assuming the events that trigger these options occur mid-point between the Notes issuance and maturity.  The Group determined from the DCF analysis that there was additional value over and above the conversion option.  As such, the Group estimated at both June 30, 2024 and at December 31, 2023, a 10% probability for either option occurring with an 80% probability of conversion at the Conversion Price.  Accordingly, the estimated value for the embedded derivative was estimated at US$12,303 ($16,832) on June 30, 2024 (December 31, 2023 – US$12,597 ($16,687)) and as a result the Group recorded a loss in the change in fair value of $145 (December 31, 2023 – gain of $1,179) for the embedded derivative.  

The valuation of the embedded derivative is sensitive to changes in the Company’s share price and assumed volatility of the Company’s share price.  If the assumed volatility increases/decreases by 10%, the fair value of the embedded derivative increases/decreases by approximately 3-4%.  If the share price is reduced/increased by 10%, the fair value of the embedded derivative reduces/increases by approximately 11%. 

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Northern Dynasty Minerals Ltd.

Notes to the Condensed Consolidated Interim Financial Statements

For the three and six months ended June 30, 2024, and 2023

(Unaudited - Expressed in thousands of Canadian Dollars, unless otherwise stated, and except per equity unit)

8.

RELATED PARTY BALANCES AND TRANSACTIONS

The components of transactions to related parties are as follows:

Receivable from related party

Hunter Dickinson Services Inc. ("HDSI") (b)

Total

Payables to related parties

Key management personnel ("KMP") (a)

Hunter Dickinson Services Inc. (b)

Total