CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS€¦ · The Company’s corporate office is located at 1040 West Georgia Street, 15th floor, Vancouver, British Columbia. The condensed

CONDENSEDCONSOLIDATEDINTERIMFINANCIALSTATEMENTS

THREEANDSIXMONTHSENDEDJUNE30,2012

(ExpressedinthousandsofCanadianDollars)

(Unaudited)

NorthernDynastyMineralsLtd.CondensedConsolidatedInterimStatementsofFinancialPosition(Unaudited‐ExpressedinthousandsofCanadianDollars)

June30 December31Notes 2012 2011

ASSETS

Non‐currentassetsInvestmentinthePebbleLimitedPartnership 3 101,652$ 101,542$Explorationandevaluationassets 4 1,055 1,055

102,707 102,597

CurrentassetsBalancesreceivablefromarelatedparty 8 29 483Amountsreceivableandotherassets 5 4,909 4,704Cashandcashequivalents 6 33,667 37,457

38,605 42,644

TotalAssets 141,312$ 145,241$

EQUITY

Sharecapital 7 389,153$ 388,987$Reserves 51,636 48,132Deficit (303,598) (295,763)

137,191 141,356LIABILITIES

Non‐currentliabilitiesDeferredincometaxes 3,719 3,715

3,719 3,715

CurrentliabilitiesAmountspayableandotherliabilities 402 170

402 170

TotalLiabilities 4,121 3,885

TotalEquityandLiabilities 141,312$ 145,241$

Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedinterimfinancialstatements

ThesecondensedconsolidatedinterimfinancialstatementsareauthorizedforissuebytheBoardofDirectorsonAugust7,2012.TheyaresignedontheCompany'sbehalfby:

/s/RonaldW.Thiessen /s/RobertA.Dickinson

RonaldW.Thiessen RobertA.DickinsonDirector Director

Asat

Page 2

NorthernDynastyMineralsLtd.CondensedConsolidatedInterimStatementsofComprehensiveLoss(Unaudited‐ExpressedinthousandsofCanadianDollars,exceptforshareinformation)

Notes 2012 2011 2012 2011

ExpensesExplorationandevaluation 1,274 141 2,543 457Generalandadministrative 1,049 2,146 2,227 3,624Share‐basedcompensation 1,702 2,782 3,479 9,283

Lossfromoperatingactivities 4,025 5,069 8,249 13,364Interestincome (251) (225) (414) (422)

Lossbeforetax 3,774 4,844 7,835 12,942Incometax(recovery)expense – – – –

Lossfortheperiod 3,774$ 4,844$ 7,835$ 12,942$

Othercomprehensiveloss(income)ExchangedifferencearisingontranslationofinvestmentinthePebbleLimitedPartnership 3 (2,057) 509 (110) 3,005

Deferredincometaxoninvestment 76 (19) 4 (110)Othercomprehensiveloss(income)fortheperiod (1,981)$ 490$ (106)$ 2,895$

Totalcomprehensivelossfortheperiod 1,793$ 5,334$ 7,729$ 15,837$

Basicanddilutedlosspercommonshare 9 0.04$ 0.05$ 0.08$ 0.14$

Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedinterimfinancialstatements

SixmonthsendedJune30ThreemonthsendedJune30

Page 3

NorthernDynastyMineralsLtd.CondensedConsolidatedInterimStatementsofCashFlows(Unaudited‐ExpressedinthousandsofCanadianDollars)

Note 2012 2011

CashflowsfromoperatingactivitiesLossfortheperiod (7,835)$ (12,942)$Adjustmentsforitemsnotaffectingcash:Donationofshares – 866Foreignexchangeloss (3) 97Interestincome (414) (422)Share‐basedcompensation 3,479 9,283

(4,773) (3,118)Changesinnon‐cashworkingcapitalitemsDecreaseinamountsreceivableandotherassets 19 70Decreaseinbalancesreceivablefromrelatedparties 454 75Increase(decrease)inamountspayableandotherliabilities 232 (370)Increaseinbalancespayabletorelatedparties – 8

705 (217)

Netcashusedinoperatingactivities (4,068) (3,335)

CashflowsfrominvestingactivitiesInterestreceived 197 279

Netcashfrominvestingactivities 197 279

CashflowsfromfinancingactivityCommonsharesissuedforcash,netofissuecosts 7 85 4,194Netcashfromfinancingactivity 85 4,194

Net(decrease)increaseincashandcashequivalents (3,786) 1,138Effectofexchangeratefluctuationsoncashheld (4) (1)Cashandcashequivalentsatbeginningoftheperiod 37,457 40,402

Cashandcashequivalentsatendoftheperiod 33,667$ 41,539$

Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedinterimfinancialstatements.

SixmonthsendedJune30

Page 4

NorthernDynastyMineralsLtd.CondensedConsolidatedInterimStatementsofChangesinEquity(Unaudited‐ExpressedinthousandsofCanadianDollars,exceptforshareinformation)

ForeignEquitysettled currencyshare‐based translation Investment

Numberof payments reserve revaluationshares Amount reserve (note7(c)) reserve Deficit Totalequity

BalanceatJanuary1,2011 94,177,066 380,570$ 34,799$ 316$ (1)$ (275,624)$ 140,060$Sharesissuedforcashonexerciseofsharepurchaseoptions 722,108 4,194 – – – – 4,194Fairvalueofshareoptionsallocatedtosharesissuedonexercise – 2,643 (2,643) – – – –Sharesdonated 75,000 866 – – – – 866Share‐basedcompensation – – 9,283 – – – 9,283Lossfortheperiod – – – – – (12,942) (12,942)Othercomprehensivelossfortheperiodnetoftax – – – (2,895) – – (2,895)BalanceatJune30,2011 94,974,174 388,273$ 41,439$ (2,579)$ (1)$ (288,566)$ 138,566$

BalanceatJanuary1,2012 94,978,764 388,987$ 45,664$ 2,470$ (2)$ (295,763)$ 141,356$Sharesissuedforcashonexerciseofsharepurchaseoptions 17,000 85 – – – – 85Fairvalueofshareoptionsallocatedtosharesissuedonexercise – 81 (81) – – – –Share‐basedcompensation – – 3,479 – – – 3,479Lossfortheperiod – – – – – (7,835) (7,835)Othercomprehensiveincomefortheperiodnetoftax – – – 106 – – 106BalanceatJune30,2012 94,995,764 389,153$ 49,062$ 2,576$ (2)$ (303,598)$ 137,191$

Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedinterimfinancialstatements.

Sharecapital Reserves

Page 5

NorthernDynastyMineralsLtd.NotestotheCondensedConsolidatedInterimFinancialStatementsForthethreeandsixmonthsendedJune30,2012and2011(Unaudited‐ExpressedinthousandsofCanadianDollars,unlessotherwisestated)

Page6

1. NATUREOFOPERATIONSANDCONTINUANCEOFOPERATIONS

NorthernDynastyMineralsLtd. (the "Company") is incorporatedunder the lawsof theProvinceofBritishColumbia,Canada,anditsprincipalbusinessactivityistheexplorationofmineralproperties.TheCompany’scorporateofficeislocatedat1040WestGeorgiaStreet,15thfloor,Vancouver,BritishColumbia. Thecondensedconsolidated interim financial statements ("FinancialStatements")of theCompanyasatandfortheperiodendedJune30,2012,includefinancialinformationfortheCompanyand its subsidiaries (note2(c)) (together referred to as the "Group" and individually as "Groupentities")andtheGroup’sinterestinjointlycontrolledentities.TheCompanyistheultimateparent.TheGroupownsa50%shareinthePebbleLimitedPartnership(the"PebblePartnership")(note3).ThePebblePartnershipownsthePebbleCopper‐Gold‐MolybdenumProject(the"PebbleProject"),theGroup’s principal mineral property interest located in Alaska, United States of America ("USA" or"US").TheGroupisintheprocessofexploringthePebbleProjectandhasnotyetdeterminedwhetherthePebbleProjectcontainsmineralreservesthatareeconomicallyrecoverable.TheGroup’scontinuingoperationsandtheunderlyingvalueandrecoverabilityoftheamountsshownforthe investmentinthePebblePartnershipisentirelydependentupontheexistenceofeconomicallyrecoverablemineralreserves; the ability of the Group to obtain financing of its share to complete the exploration anddevelopmentofthePebbleProject;thePebblePartnershipobtainingthenecessarypermitstomine;and future profitable production or proceeds from the disposition of the investment in the PebblePartnership.

2. SIGNIFICANTACCOUNTINGPOLICIES

(a) StatementofComplianceThese Financial Statements have been prepared in accordance with IAS34, Interim FinancialReporting,as issued by the International Accounting Standards Board ("IASB") and interpretationsissuedby the IFRS InterpretationsCommittee (IFRICs). Theydonot include all of the informationrequired by International Financial Reporting Standards ("IFRS") for complete annual financialstatements,andshouldbereadinconjunctionwiththeGroup’sconsolidatedfinancialstatementsasatandfortheyearendedDecember31,2011.Accordinglyaccountingpoliciesappliedotherthanasnoted inNote2(e) are the same as those applied in theGroup’s annual financial statementswhichwerefiledundertheCompany’sprofileonSEDARatwww.sedar.com.

(b) BasisofPreparation

TheseFinancialStatementshavebeenpreparedonahistorical costbasisusing theaccrualbasisofaccounting, except for cash flow information, and modified as required for financial instrumentsclassifiedasavailable‐for‐salewhicharestatedattheirfairvalue.


Page7

(c) BasisofConsolidation

TheseFinancialStatementsincorporatethefinancialstatementsoftheCompanyanditssubsidiarieslistedbelow:

NameofSubsidiary PlaceofIncorporationOwnership

Interest PrincipalActivity3537137CanadaInc. Canada 100% HoldingGroup0796412BCLtd. BritishColumbia,Canada 100% NotactiveNorthernDynastyPartnership1 Alaska,USA 100% HoldingGroupU5ResourcesInc.2 Nevada,USA 100% HoldingCompany

1 HoldstheGroup’s50%interestinPebbleMinesCorp.andthePebblePartnership(note3).2 HoldstheGroup’sclaimspurchasedfromLibertyStar(note4).TheGrouphasdeterminedthatitsinvestmentinthePebblePartnershipqualifiesasaninterestinajointly controlled entity under IAS 31, Interests in JointVentures ("IAS31") and applies the equitymethodtoaccountforthisinterest.Theinvestmentiscarriedinthestatementoffinancialpositionatcost and adjusted by post‐acquisition changes in the Group’s share of the net assets of the jointventure, less any impairment losses. As the Group’s investment is carried in US dollars, theinvestmentistranslatedattheendofeachreportingperiod(note3).Intra‐Group balances and transactions, including any unrealized income and expenses arising fromintra‐Group transactions, are eliminated in preparing the Financial Statements. Unrealized gainsarising from transactionswith equity accounted investees are eliminated against the investment totheextentoftheGroup’sinterestintheinvestee.Unrealizedlossesareeliminatedinthesamewayasunrealizedgains,butonlytotheextentthatthereisnoevidenceofimpairment.

(d) SignificantAccountingEstimatesandJudgments

The preparation of these Financial Statements requires management to make certain estimates,judgmentsandassumptionsthataffectthereportedamountsofassetsandliabilitiesatthedateoftheFinancialStatementsandreportedamountsofexpensesduringthereportingperiod.Actualoutcomescould differ from these estimates. These Financial Statements include estimates which, by theirnature, are uncertain. The impacts of such estimates are pervasive throughout the FinancialStatements, and may require accounting adjustments based on future occurrences. Revisions toaccountingestimatesarerecognizedintheperiodinwhichtheestimateisrevisedandfutureperiodsif the revision affects both current and future periods. These estimates are based on historicalexperience,currentandfutureeconomicconditionsandotherfactors,includingexpectationsoffutureeventsthatarebelievedtobereasonableunderthecircumstances.SourcesofestimationuncertaintySignificant assumptions about the future and other sources of estimation uncertainty thatmanagementhasmadeattheendofthereportingperiod,thatcouldresultinamaterialadjustmenttothecarryingamountsofassetsandliabilities,intheeventthatactualresultsdifferfromassumptionsmade,relateto,butarenotlimitedto,thefollowing:


Page8

i. Inputsusedinmeasuringshare‐basedcompensation;andii. Provision for the deferred income tax expense and the composition of deferred income tax

liabilities.CriticalaccountingjudgmentsTheseinclude:

i. Recoverabilityofamountsreceivable;ii. Recoverability of the carrying value of the investment in the Pebble Partnership and the

Group’sexplorationandevaluationassets;andiii. Determination of categories of financial assets and financial liabilities which has been

identifiedasanaccountingpolicywhichinvolvesassessmentsmadebymanagement.

(e) NewAccountingStandards,InterpretationsandAmendmentstoExistingStandards

NewandamendedstandardsadoptedbytheGroupEffective January 1, 2012, the Group adopted amendments to IFRS7, Financial Instruments:Disclosures that were issued by the IASB. The application of these amendments has not had anymaterial impact on current and prior year disclosures but may affect disclosures for futuretransactionsorarrangements.

Neworrevisedstandards,interpretationsandamendmentstoexistingstandardsnotyeteffective

(i) EffectiveforannualperiodsbeginningonorafterJuly1,2012

AmendmentstoIAS1,PresentationofFinancialStatements

(ii) EffectiveforannualperiodsbeginningonorafterJanuary1,2013 NewstandardIFRS10,ConsolidatedFinancialStatements. NewstandardIFRS11,JointArrangements NewstandardIFRS12,DisclosureofInterestsinOtherEntities NewstandardIFRS13,FairValueMeasurement ReissuedIAS27,SeparateFinancialStatements ReissuedIAS28,InvestmentsinAssociatesandJointVentures

TheGrouphasnotearlyadoptedtheseneworreissuedstandardsandiscurrentlyassessingtheimpactthatthesestandardswillhaveontheGroup’sconsolidatedfinancialstatements.

NewinterpretationIFRIC20,StrippingCostsintheProductionPhaseofaSurfaceMine

ThisinterpretationandtherequirementsforaccountingforstrippingcostswillonlybeapplicabletotheGrouponceitisintheproductionphase.

(iii) EffectiveforannualperiodsbeginningonorafterJanuary1,2015

NewstandardIFRS9,FinancialInstruments,ClassificationandMeasurementTheGroupanticipates that theadoptionof this standardwillhavenomaterial impactexceptforadditionaldisclosures.


Page9

3. INVESTMENTINTHEPEBBLELIMITEDPARTNERSHIP

On July26, 2007, the Group converted a wholly‐owned general partnership that held its PebbleProperty interest into a limited partnership, the Pebble Partnership. Anglo American plc ("AngloAmerican")throughawholly‐ownedsubsidiarysubscribedfor50%ofthePebblePartnership'sequityeffective July31,2007. TheGroup (through awholly‐owned subsidiary) andAngloAmericanhaveequalrightsinthePebblePartnership.Tomaintainits50%interestinthePebblePartnership,AngloAmericanisrequiredtocommitstagedcashinvestments intothePebblePartnershipaggregatingtoUS$1.5billion.Anglo American’s staged investment requirements include an initial minimum expenditure ofUS$125million(completedin2008)towardsaprefeasibilityreport.TheprefeasibilityreportistobeapprovedbytheBoardofthegeneralpartner(PebbleMinesCorp.),andistosummarizeallpreviousprefeasibilitystudies.TheBoardofthegeneralpartnerisalsotoapprovethealternativesforafinalfeasibility study. Anglo American is required, in order to retain its 50% interest in the PebblePartnership,tocommitwithin90daysofthelaterofthereceiptoftheapprovedprefeasibilityreportand the approved study alternatives, to fund further expenditures which would bring its totalinvestmenttoatleastUS$450million,whichamountistobeexpendedinproducingafinalfeasibilitystudy and in related activities, which is expected to take the Pebble Partnership to a productiondecision.UponanaffirmativedecisionbythePebblePartnershiptodevelopamine,AngloAmericanis required tocommit to theremainingportionof the total investmentofUS$1.5billion inorder toretainitsinterestinthePebblePartnership.FollowingcompletionoftheUS$1.5billionexpenditure,any further expenditure will be funded by Anglo American and the Group on a 50/50 basis. ToJune30,2012, Anglo American has funded US$444million ($464million). The Pebble Partnershipagreementprovidesforequalprojectcontrolrightsforbothpartnerswithnooperator’sfeespayabletoeitherparty.TheGrouphasdeterminedthatitsinvestmentinthePebblePartnershipqualifiesasaninterestinajointlycontrolledentityunder IAS31andapplies theequitymethod inaccounting for this interest.TheGrouphasnotrecognizedanyshareofthelossesinthePebblePartnershipsinceinceptionastheGrouphasnoobligationinrespecttotheselossesastheagreementwithAngloAmericanstatesthatthedistributionoflossesfundedbyAngloAmericanareallocated100%toAngloAmericanuntilthetotal investmentofUS$1.5billionismet. ForthesixmonthperiodendedJune30,2012,thePebblePartnershiphasincurredlossestotaling$39,710(2011–$29,193).CumulativelossessinceinceptionofthePebblePartnershiptoJune30,2012total$458,957(2011–$362,049).TheaccountingpoliciesofthePebblePartnershiparethesameasthosefollowedbytheGroup.TheGroup’sinvestmentinthePebblePartnershipiscarriedinUSdollars. ExchangedifferencesarisingfromthetranslationoftheGroup’s investment in the Pebble Partnership are recognized directly in the foreign currencytranslationreservethroughothercomprehensiveloss.

InvestmentinthePebblePartnership AsatJune30 AsatDecember31

2012 2011Carryingvalueatthebeginningoftheperiod $101,542 $99,306Foreigncurrencytranslation(note7(c)) 110 2,236

Carryingvalueattheendoftheperiod $101,652 $101,542


Page10

Summaryfinancialinformationfortheequityaccountedinvestee,notadjustedforthe50%ownershipheldbytheGroup,isasfollows:

AssetsandLiabilities AsatJune30 AsatDecember31 2012 2011Non‐currentassets $102,773 $101,311Currentassets 15,011 14,095Totalassets $117,784 $115,406 Currentliabilities 7,928 10,522Totalliabilities $7,928 $10,522

Losses ThreemonthsendedJune30 SixmonthsendedJune30 2012 2011 2012 2011

Netlossfortheperiod $21,645 $19,416 $39,710 $29,193Netcumulativelosses – – 458,957 362,049

The net loss and the cumulative losses of the Pebble Partnership have not been included in theFinancialStatementsoftheGroup.

4. EXPLORATIONANDEVALUATIONASSETS

AsatJune30 AsatDecember31

2012 2011

Costatbeginningandendofperiod $1,055 $1,055

On June 29, 2010, theGroup entered into a binding letter agreementwith Liberty StarUranium&MetalsCorp.anditssubsidiary,BigChunkCorp.(together,"LibertyStar"),pursuanttowhichLibertyStar sold 60.7 square kilometers of mineral claims located to the west of the Pebble Project inconsiderationforaUS$1,000($1,055)cashpayment.ThePebblePartnershiphadtherighttoacquiretheseclaimsfromtheGroupbutdeclinedtoexercisethatright.

5. AMOUNTSRECEIVABLEANDOTHERASSETS

AsatJune30 AsatDecember31 2012 2011

Amountsreceivable $113 $236Loanreceivable(a) 4,516 4,292Otherassets–prepayments 280 176

Total $4,909 $4,704


Page11

(a) LoanreceivableTheGroupadvancedtoLibertyStarUS$3,000($3,165)pursuanttotheletteragreementdatedJune29,2010 (note4). Pursuant to amendments to the letteragreementdatedSeptember8,2011andNovember14,2011,theprincipalamountoftheloanwasincreasedfortheamountsexpendedbytheGroupin2011and2010onannualassessmentwork,rentalandrelatedfeesrelatingtoLibertyStar’sclaimsinAlaska.Thefollowingsummarizesthemovementintheloanreceivable: AsatJune30 AsatDecember31

2012 2011

Balanceatbeginningofyear $4,292 $3,136Additions Expensespaid – 740Interestaccrued 217 334Foreignexchangegain 7 82

Balanceatendofperiod $4,516 $4,292Theloanreceivableaccruesinterestat10%perannumcompoundedmonthlyandissecuredbyassetsandminingclaimsownedbyLibertyStarinAlaska,USA.Theloanandaccruedinterestisrepayableondemandandwillbeduewithin45daysthereof,orconvertibleintoLibertyStarshares,providedtheGrouphas spent at least aminimumamount (the “MinimumExpenditure”) earning intoa jointventure(whichhasstilltobeformedasofthedateoftheseFinancialStatements–seebelow).TheMinimumExpenditurewasoriginally set atUS$1,000,but theGroupandLibertyStar subsequentlyagreedonNovember14,2011toreducetheMinimumExpenditurebyUS$714plusaccruedinterestas a result of the additions to the loan. As of June 30, 2012, theMinimum Expenditure has beenreducedtoUS$228.TheGrouphasstilltocompletethisexpenditurerequirement.Subject to negotiating and signing a definitive earn‐in option and joint venture agreement ("JVAgreement"), theGroupcanearna60%interest incertainofLibertyStar’sproperties inAlaskabyspendingUS$10millioninexplorationandclaimmaintenanceonthosepropertiesoversixyears.Theinitialloanadvancedplusaccruedinterestmaybeappliedaspartoftheearn‐inrequirements,attheGroup’sdiscretion.ShouldaJVAgreementbeenteredinto,theloanplusaccruedinterestisrepayableondemandupon45days’noticeaftertheearlierof:

a. Thecompletionoftheearn‐inexpenditure;orb. TheGroupdecidestovoluntarilyterminatetheJVAgreementprovidedtheGrouphas

spentatleasttheMinimumExpenditure;orc. LibertyStarterminatestheJVAgreementduetoasuperior3rdpartyoffer.

The loan is convertible at the option of the Group, until the loan is repaid or deemed repaid, intocommon shares of Liberty Star based on a 5 day volume weighted average share price less themaximum allowable discount applicable as if Liberty Star shares were listed on the TSX VentureExchange,providedthattheGrouphasspenttheMinimumExpenditure.Theloanmaybepre‐paidbyLibertyStarwithoutpenaltyatanytimeon10days’priornotice,duringwhichtheGroup’sconversionrightswillbeunaffected.


Page12

6. CASHANDCASHEQUIVALENTS

AsatJune30 AsatDecember31 2012 2011Businessandsavingsaccounts $11,976 $28,055Guaranteedinvestmentcertificates 21,691 9,402Total $33,667 $37,457

7. CAPITALANDRESERVES

(a) AuthorizedShareCapitalAtJune30,2012,theauthorizedsharecapitalcomprisedanunlimitednumberofcommonshareswithnoparvalue.Allissuedsharesarefullypaid.

(b) SharePurchaseOptionCompensationPlanThefollowingsummarizesthechangesintheGroup’soutstandingsharepurchaseoptionsforthesixmonthperiodsendedJune30,2012and2011:

2012 2011

Continuityofshareoptions

Numberofshare

purchaseoptions

Weightedaverage

exerciseprice($/option)

Numberofsharepurchase

options

Weightedaverage

exerciseprice($/option)

Balanceatbeginningofperiod 8,306,782 8.71 6,795,110 6.19Granted 2,199,500 3.00 2,198,400 15.44Exercised (17,000) 5.00 (722,108) 5.81Expired (1,525,052) 5.56 (10,000) 9.74Forfeited (30,000) 9.16 (39,000) 8.80

Balanceatendofperiod 8,934,230 7.85 8,222,402 8.68 Sharepurchaseoptionsexercisedduringtheperiodwereasfollows:

PeriodSharepurchase

optionsexercised

Weightedaverageexerciseprice

($/option)

Weightedaverageshareprice

($)

January1–June30,2012 17,000 5.00 7.85

17,000 5.00 7.85

The Group granted 2.2million share purchase options (see continuity table above) in the threemonths ended June 30, 2012. In the prior year, theGroup had granted 2.2million share purchaseoptions in the threemonths endedMarch 31, 2011. Theweighted average fair value of the sharepurchaseoptionsgrantedwas$0.87peroption(2011–$6.57peroption).


Page13

Optionswerepricedbasedon theBlack‐Scholesoptionpricingmodelusing the followingweightedaverageassumptionstoestimatethefairvalueofoptionsgranted: Threemonthsended

June30,2012Threemonthsended

March31,2011Risk‐freeinterestrate 1.11% 2.29%Expectedlife 3.43years 4.15yearsExpectedvolatility 60% 64%Grantdateshareprice $2.38 $13.78Expecteddividendyield Nil Nil

Optionpricingmodelsrequiretheinputofhighlysubjectiveassumptionsincludingtheexpectedpricevolatility. The Group determines volatility using historical closing prices as a basis for expectedvolatilityfromthreetofiveyears. Changesinthesubjectiveinputassumptionscanmateriallyaffectthe fair value estimate, and therefore the existing models do not necessarily provide a reliablemeasureofthefairvalueoftheGroup'ssharepurchaseoptions.

(c) ForeignCurrencyTranslationReserve

SixmonthsendedJune30

2012 2011Balanceatbeginningofperiod $2,470 $316Exchangegain(loss)ontranslationofinvestmentinthePebblePartnership 110 (3,005)

Deferredincometaxoninvestment (4) 110Balanceattheendofperiod $2,576 $(2,579)

TheforeigncurrencytranslationreserverepresentsaccumulatedexchangedifferencesarisingonthetranslationoftheinvestmentinthePebblePartnershipwhichhasaUSdollarfunctionalcurrencyandtherelatedtaxeffectthathasbeenrecognizedinothercomprehensiveloss.

8. RELATEDPARTYBALANCESANDTRANSACTIONS

TransactionsandbalanceswithKeyManagementPersonnelThe aggregate value of transactions with key management personnel being directors and seniormanagement comprising the Senior Vice President, Corporate Development; Vice President ("VP")CorporateCommunication,VP,EngineeringandVP,PublicAffairswereasfollows: ThreemonthsendedJune30 SixmonthsendedJune30Compensation 2012 2011 2012 2011Short‐termemployeebenefits(a) $419 $389 $820 $799Share‐basedcompensation 720 1,437 1,678 4,876Total $1,139 $1,826 $2,498 $5,675(a) Short‐termemployeebenefitsincludesalariesanddirectorsfees.


Page14

TransactionsandbalanceswithotherRelatedPartiesThe aggregate value of transactions and outstanding balances with other related parties were asfollows: Threemonthsended June30 Sixmonthsended June30Transactions 2012 2011 2012 2011Entitywithsignificantinfluence(a) ServicesrenderedtotheGroup $799 $832 $1,529 $1,702ReimbursementofthirdpartyexpensesincurredonbehalfoftheGroup 114 162 767 479

TotalpaidbytheGroup $ 913 $ 994 $2,296 $ 2,181Jointlycontrolledentity(b) ReimbursementofthirdpartyexpensesincurredbytheGroup $(21) $– $(21) $–

Totalreimbursed(to)theGroup $(21) $ – $(21) $–

AsatJune30 AsatDecember31

Balancesreceivablefromrelatedparties 2012 2011Entitywithsignificantinfluence(a) $8 $483Jointlycontrolledentity(b) 21 –Total $29 $483(a) A private company provides geological, corporate development, administrative and management

services to the Group and its subsidiaries at annually set rates pursuant to a management servicesagreement. The private company also incurs third party costs on behalf of the Group which isreimbursedbytheGroupatcost.TheGroupmayalsomakepre‐paymentsforservicesundertermsoftheservicesagreement.Severaldirectorsandotherkeymanagementpersonneloftheprivatecompany,whoareclosebusinessassociates,arealsokeymanagementpersonneloftheGroup.

(b) TheGroupincurredcostsonbehalfofthejointlycontrolledentity(note3)whichistobereimbursedatcost.

9. BASICANDDILUTEDLOSSPERSHARE

ThecalculationofbasicanddilutedlosspershareforthethreeandsixmonthperiodsendedJune30,2012wasbasedonthefollowing:

ThreemonthsendedJune30 SixmonthsendedJune30

2012 2011 2012 2011Lossattributabletocommonshareholders $3,774 $4,844 $7,835 $12,942

Weightedaveragenumberofcommonsharesoutstanding 94,995,764 94,881,703 94,992,682 94,725,468


Page15

Diluted losspersharedidnot includetheeffectof theweightedaveragenumberofsharepurchaseoptionsoutstanding for the threeandsixmonthperiodsendedJune30,2012of8,252,680(2011–8,267,983)and8,274,314(2011–7,537,997)respectivelyastheyareanti‐dilutive.

10. EMPLOYMENTCOSTS

Theamountofsalariesandbenefitsincludedinexpensesareasfollows: ThreemonthsendedJune30 SixmonthsendedJune30 2012 2011 2012 2011Exploration Salaries $205 $121 $438 $ 299

Administration Salaries 648 750 1,184 1,528

Share‐basedcompensation 1,702 2,782 3,479 9,283Total $2,555 $3,653 $5,101 $11,110

11. COMMITMENTSANDCONTINGENCIES

DuetothenatureoftheGroup’soperations,variouslegalandtaxmattersareoutstandingfromtimetotime.Intheopinionofmanagement,therearenomattersthatcouldhaveamaterialeffectontheGroup’s condensed consolidated interim financial position or results of operations which requireadditionaldisclosureintheseFinancialStatements.

12. EVENTSAFTERTHEREPORTINGPERIOD

(a) CertaindirectorsoftheCompanyvoluntarilyelectedtocancel861,000sharepurchaseoptionsthatweregrantedtothemonMarch15,2011withanexercisepriceof$15.44peroptionandanexpiryofMarch15,2016.

(b) 405,000sharepurchaseoptionsexpiredunexercisedwithaweightedaverageexercisepriceof$7.70peroption.

(c) 7,000sharepurchaseoptionswereforfeitedwithanaverageexercisepriceof$6.55peroptionwithexpirydatesofMarch15,2014andJune29,2015.

MANAGEMENT'SDISCUSSIONANDANALYSIS

THREEANDSIXMONTHSENDEDJUNE30,2012

NorthernDynastyMineralsLtd.Management'sDiscussionAndAnalysis

ThreeandSixmonthsendedJune30,2012

Page 2

TABLEOFCONTENTS

1.1DATE ............................................................................................................................................ 3

1.2 OVERVIEW ......................................................................................................................................... 5 1.2.1 SUMMARY ............................................................................................................................. 5

1.2.1.1 PEBBLEPROJECT........................................................................................................................51.2.1.2 LIMITEDPARTNERSHIPESTABLISHEDTOADVANCETHEPEBBLEPROJECT...................81.2.1.3 TECHNICALPROGRAMS.............................................................................................................91.2.1.4 LEGALMATTERS......................................................................................................................12

1.2.2 OTHERPROPERTIES ............................................................................................................ 14 1.2.2.1 SOUTHPEBBLE,SPANDKAKCLAIMS.................................................................................141.2.2.2 BIGCHUNKNORTHANDSOUTH............................................................................................14

1.2.3 MARKETTRENDS ................................................................................................................ 15

1.3 NOTUSED ........................................................................................................................................ 17

1.4 SUMMARYOFQUARTERLYRESULTS ................................................................................................... 17

1.5 RESULTSOFOPERATIONS .................................................................................................................. 19

1.6 LIQUIDITY ........................................................................................................................................ 22

1.7 CAPITALRESOURCES ......................................................................................................................... 23

1.8 OFF‐BALANCESHEETARRANGEMENTS .............................................................................................. 23

1.9 TRANSACTIONSWITHRELATEDPARTIES ........................................................................................... 23

1.10 NOTUSED ........................................................................................................................................ 24

1.11 PROPOSEDTRANSACTIONS ................................................................................................................ 24

1.12 CRITICALACCOUNTINGESTIMATES .................................................................................................... 24

1.13 CHANGESINACCOUNTINGPOLICIESINCLUDINGINITIALADOPTION ..................................................... 27

1.14 FINANCIALINSTRUMENTSANDOTHERINSTRUMENTS ........................................................................ 27

1.15 OTHERMD&AREQUIREMENTS ......................................................................................................... 30 1.15.1DISCLOSUREOFOUTSTANDINGSHAREDATA .......................................................................... 30 1.15.2DISCLOSURECONTROLSANDPROCEDURES ............................................................................. 30 1.15.3MANAGEMENT’SREPORTONINTERNALCONTROLOVERFINANCIALREPORTING ...................... 30 1.15.4CHANGESININTERNALCONTROLOVERFINANCIALREPORTING ............................................... 31 1.15.5LIMITATIONSOFCONTROLSANDPROCEDURES ....................................................................... 31 1.15.6RISKFACTORS ....................................................................................................................... 31



Page 3

1.1Date

This Management’s Discussion and Analysis ("MD&A") should be read in conjunction with theunauditedcondensedconsolidatedinterimfinancialstatements("InterimFinancialStatement")ofNorthern Dynasty Minerals Ltd. ("Northern Dynasty" or the "Company") for the three and sixmonthsendedJune30,2012andtheauditedconsolidatedfinancialstatementsfortheyearendedDecember31,2011andannualMD&Afor thesameperiodaspublicly filedunder theCompany’sprofileonSEDARatwww.sedar.com.

TheCompanyreportsinaccordancewithInternationalFinancialReportingStandards("IFRS")andthefollowingdisclosure,andassociatedInterimFinancialStatement,arepresentedinaccordancewithIFRS.ThisMD&AispreparedasofAugust7,2012.AlldollaramountshereinareexpressedinCanadiandollars,unlessotherwisespecified.

This discussion includes certain statements that may be deemed "forward‐looking statements".Theseforward‐lookingstatementsconstitute"forward‐lookingstatements"withinthemeaningofSection27AoftheSecuritiesActof1933andSection21EoftheSecuritiesExchangeActof1934.

AllinformationcontainedinthismanagementdiscussionrelatingtothecontentsofthePreliminaryAssessment, including but not limited to statements of the potential of the Pebble Copper‐Gold‐Molybdenum Project (the "Pebble Project") and information under the headings "PreliminaryAssessmentKeyFindings,""ProductionProfiles,""FinancialValuation"and"CapitalandOperatingCosts"are"forwardlookingstatements"withinthedefinitionoftheUnitedStatesPrivateSecuritiesLitigationReformActof1995.Theinformationrelatingtothepossibleconstructionofaport,road,powergeneratingfacilitiesandpowertransmissionfacilitiesalsoconstitutessuch"forwardlookingstatements." ThePreliminaryAssessmentwasprepared tobroadlyquantify thePebbleProject'scapital and operating cost parameters and to provide guidance on the type and scale of futureproject engineering anddevelopmentwork thatwill beneeded toultimatelydefine theproject'slikelihoodoffeasibilityandoptimalproductionrate.ItwasnotpreparedtobeusedasavaluationofthePebbleProjectnorshoulditbeconsideredtobeaprefeasibilitystudy.Althoughbasedonacomprehensive technical review of recent engineering and technical studies undertaken by thePebbleLimitedPartnership(the"PebblePartnership")andNorthernDynasty,thestudiesofcapitalandoperatingcostsare incompleteandhavenotbeenoptimized, so theultimatecostsmayvarysignificantly from theamounts setout in thePreliminaryAssessment. This couldmaterially andadversely impact the projected economics of thePebble Project. The PreliminaryAssessment isbasedonWardrop’s (aTetraTechCompany)comprehensivereviewofengineeringand technicalstudiesundertakenprincipallybythePebblePartnershipandbyNorthernDynastytothetimeofthe report. The economic assessments and other opinions expressed in the PreliminaryAssessmentarestrictlythoseofNorthernDynastyandWardrop,anddonotreflecttheviewsofanyotherstakeholderintheproject. Assuch,anyprojectwhichisultimatelyputforwardbythePebblePartnershipforpermittingundertheNationalEnvironmentalPolicyActmaydifferfromthoseminemodelspresentedinthePreliminaryAssessment.

The Preliminary Assessment, in part, uses inferredmineral resources which are considered toospeculativegeologicallytobecategorizedasmineralreservesandtohaveeconomicconsiderationsappliedtothem.TherecanbenoassurancethattheoperatingandfinancialprojectionscontainedinthePreliminaryAssessmentwillberealized.

Thefollowingaretheprincipalriskfactorsanduncertaintieswhich,inmanagement'sopinion,arelikely to most directly affect the conclusions of the Preliminary Assessment and the ultimatefeasibility of the Pebble Project. A portion of the mineralized material at the Pebble Project is



Page 4

currentlyclassifiedasaninferredresourceanditisnotareserve.ThemineralizedmaterialinthePreliminaryAssessment isbasedonthemeasured, indicatedandinferredresourcesestimatedbyHunter Dickinson Services Inc. and audited by Wardrop. Additional process tests and otherengineering and geologic work will be required to determine if the mineralized material is aneconomically exploitable reserve. There can be no assurance that thismineralizedmaterial canbecomea reserveor theamount thatmaybe converted to a reserveor thegrade thereof. Finalfeasibility work has not been done to confirm the pit design, mining methods, and processingmethods assumed in the Preliminary Assessment. Final feasibility could determine that theassumedpitdesign,miningmethods, andprocessingmethodsarenot correct. Constructionandoperation of the mine and processing facilities depends on securing environmental and otherpermitsona timelybasis. Nopermitshavebeenapplied forand therecanbenoassurance thatrequired permits can be secured or secured on a timely basis. Data is incomplete and costestimateshavebeendevelopedinpartbasedontheexpertiseoftheindividualsparticipatinginthepreparationofthePreliminaryAssessmentandoncostsatprojectsbelievedtobecomparable,andnotbasedonfirmpricequotes. Costs, includingdesign,procurement,construction,andon‐goingoperating costs and metal recoveries could be materially different from those contained in thePreliminaryAssessment.Therecanbenoassurancethatminingcanbeconductedattheratesandgrades assumed in the Preliminary Assessment. The project requires the development of portfacilities, roads and electrical generating and transmission facilities. AlthoughNorthernDynastybelieves that the State of Alaska favours the development of these facilities, there can be noassurancethattheseinfrastructurefacilitiescanbedevelopedonatimelyandcost‐effectivebasis.Energyrisksincludethepotentialforsignificantincreasesinthecostoffuelandelectricity.

ThePreliminaryAssessmentassumesspecified, long‐termprice levelsforgold,copper,silverandmolybdenum.Pricesforthesecommoditiesarehistoricallyvolatile,andNorthernDynastyhasnocontroloforinfluenceonthoseprices,allofwhicharedeterminedininternationalmarkets.TherecanbenoassurancethatthepricesofthesecommoditieswillcontinueatcurrentlevelsorthattheywillnotdeclinebelowthepricesassumedinthePreliminaryAssessment. Pricesforgold,copper,silver, andmolybdenum have been below the price ranges assumed in Preliminary Assessmentduringthepasttenyears,andforextendedperiodsoftime.

The Pebble Project will require major financing, probably a combination of debt and equityfinancing.Interestratesareathistoricallylowlevels.Therecanbenoassurancethatdebtand/orequity financingwill be available on acceptable terms. A significant increase in costs of capitalcouldmateriallyandadverselyaffectthevalueandfeasibilityofconstructingtheproject.

Othergeneralrisksincludethoseordinarytoverylargeconstructionprojectsincludingthegeneraluncertainties inherent in engineering and construction cost, the need to comply with generallyincreasingenvironmentalobligations,andaccommodationof localandcommunityconcerns. TheCompany is also subject to the specific risks inherent in themining business, aswell as generaleconomicandbusinessconditions.

FormoreinformationontheCompany,InvestorsshouldreviewtheCompany’sannualinformationformandForm40‐FfilingwiththeUnitedStatesSecuritiesandExchangeCommission(the"SEC")atwww.sec.govanditshomejurisdictionfilingsthatareavailableonSEDARatwww.sedar.com.

The Company reviews its forward looking statements on an ongoing basis and updates thisinformationwhencircumstancesrequireit.

Unlessotherwisenoted,NorthernDynastyissolelyresponsibleforthecontentofthedisclosuresetoutherein.



Page 5

CautionaryNotetoInvestorsConcerningEstimatesofMeasuredandIndicatedResourcesThe following section uses the terms "measured resources" and "indicated resources". TheCompany advises investors that although those terms are recognized and required by Canadianregulations,theSECdoesnotrecognizethem.Investorsarecautionednottoassumethatalloranypartofmineraldepositsinthesecategorieswilleverbeconvertedintoreserves.

CautionaryNotetoInvestorsConcerningEstimatesofInferredResourcesThe following section uses the term "inferred resources". The Company advises investors thatalthoughthistermisrecognizedandrequiredbyCanadianregulations,theSECdoesnotrecognizeit. "Inferred resources"haveagreat amountof uncertainty as to their existence, andas to theireconomicandlegalfeasibility.Itcannotbeassumedthatalloranypartofamineralresourcewillever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineralresources may not form the basis of economic studies, except in rare cases. Investors arecautionednottoassumethatalloranypartofaninferredresourceexists,oriseconomicallyorlegallymineable.

1.2 Overview

1.2.1 Summary

NorthernDynasty isamineralexplorationcompanywhichholds indirect interests in637squaremilesofmineralclaimsinsouthwestAlaska,USA.TheseclaimsarepartoforinthevicinityofthePebbleCopper‐Gold‐MolybdenumProject(the"PebbleProject").

1.2.1.1PebbleProject

ThePebbleproperty("Pebble")is locatedinsouthwestAlaska,19miles(30kilometers)fromthevillagesofIliamnaandNewhalen,andapproximately200miles(320kilometers)southwestofthecityofAnchorage.Situatedapproximately1,000feetabovesea‐leveland65milesfromtidewateron Cook Inlet, the site conditions are favorable for successful mine site and infrastructuredevelopment.

Mineralization indicating the presence of the Pebble deposit was discovered in 1987 by a prioroperator.By1997aninitialdepositofcopper,goldandmolybdenumhadbeenoutlined.

NorthernDynastyacquiredtherighttoearnaninterestinthePebblepropertyinlate2001.Overthenext5½years,theCompanyexploredthePebbledepositandsurroundingproperty.Thisworkled to the discovery of a substantial volume of higher grade mineralization to the east and anoverall expansion of the deposit, as well as the discovery of another porphyry copper‐gold‐molybdenumdeposit,aporphyrycopperzone,agold‐copperskarnoccurrence,andgoldshowingsalong the extensive northeast‐trending mineralized system underlying the property.Comprehensive environmental, social and engineering studies for the Pebble deposit began in2004.

Inmid‐2007,awholly‐ownedaffiliateofNorthernDynastyandawholly‐ownedsubsidiaryofAngloAmericanplc,AngloAmericanUS(Pebble)LLC("AngloAmerican")establishedthePebbleLimitedPartnership(the“PebblePartnership”)toengineer,permit,constructandoperateamodern,long‐life mine at the Pebble Project. The 50/50 Pebble Partnership owns the Pebble Project, which



Page 6

consists of the Pebble deposit and 350 square miles of associated resource lands, along with astreamoffinancingbeingprovidedbyAngloAmericanforcomprehensiveexploration,engineering,environmentalandsocioeconomicprogramsand,ifwarranted,developmentofthePebbleProject.WorkprogramsatPebblesincemid‐2007havebeencarriedoutbythePebblePartnership.Theseprograms include detailed engineering, environmental and socioeconomic studies toward thecompletionofaprefeasibilitystudyforthePebbleProjectwhichwillenablethePebblePartnershipto engage stakeholders in the planning process and prepare for permitting under the NationalEnvironmentalPolicyAct("NEPA").

PreliminaryAssessment

NorthernDynastycommissionedanindependentPreliminaryAssessmentofthePebbleProject,theresultsofwhichwereannouncedbytheCompanyonFebruary23,2011.Thestudy,completedbyWardrop,aTetraTechCompany("Wardrop")1,wasbasedonconcept,prefeasibilityandfeasibility‐level examinations of various components of the Pebble Project undertaken by the PebblePartnershipandNorthernDynasty.ThePreliminaryAssessmentupdatesandsubstantiallyrevisesthe project economic analysis commissioned by Northern Dynasty in 2004. The economicassessments and other opinions expressed in the Preliminary Assessment are strictly those ofNorthern Dynasty and Wardrop, and do not reflect the views of any other stakeholder in theproject.

ThePebblePartnershipcontinuestoseparatelyundertakedetailedengineering,environmentalandsocioeconomic studies toward the completion of a prefeasibility report for the Pebble Project,includingongoingprogramstoengageprojectstakeholdersintheplanningprocess. Assuch,anyprojectwhichisultimatelyputforwardbythePebblePartnershipforpermittingunderNEPAandtheAlaskaStateLargeMinePermittingProcessmaydifferfromthoseminemodelspresentedinthePreliminaryAssessment.

1 Additional details can be found in the following documents posted on the Company’s profile at www.sedar.com:

Technical Report entitled “Preliminary Assessment of the Pebble Project, Southwest Alaska, effective date February 15, 2011,” by Wardrop. QualifiedPersonsfortheFebruary2011PreliminaryAssessmentTechnicalReportincludeHassanGhaffari,P.Eng,RobertMorrison,P.Geo,AndredeRuijter,P.Eng,TysenHantelmann,P.Eng,AleksandarZivkovic,P.Eng,andScottCowie,MAusIMM;DougRamsey,P.R.Bioisauthorofsustainabilitysection.AllofthesequalifiedpersonsareindependentofNorthernDynasty;and

NorthernDynasty’sAnnualInformationFormforfiscal2010andfiscal2011.CautionaryinformationregardingthePreliminaryAssessmentisalsoprovidedonpage2ofthisMD&A.ThePreliminaryAssessmentisbasedonmineralresourcesatFebruary2010withinavolumeorshelldefinedbylong‐termmetalpriceestimatesofUS$2.50/lbcopper,US$900/ozgoldandUS$25/lbmolybdenum.Mineralresourcesthatarenotmineralreservesdonothavedemonstratedeconomicviability.Ata0.30%copperequivalent(CuEQ)cut‐off, thesecomprise: 5.94billiontonnesofMeasuredandIndicatedMineralResourcesgrading0.42%copper,0.35g/tgoldand250ppm

molybdenum(0.78%CuEQ),containing55billionpoundsofcopper,67millionouncesofgold,and3.3billionpoundsofmolybdenum;and

4.84billion tonnes of InferredMineralResources grading0.24%copper, 0.26 g/t gold and215 ppmmolybdenum(0.53% CuEQ), containing 25.6 billion pounds of copper, 40.4 million ounces of gold, and 2.3 billion pounds ofmolybdenum.

Copper equivalent calculations used metal prices of US$1.85/lb for copper, US$902/oz for gold and US$12.50/lb formolybdenum,andmetallurgicalrecoveriesof85%forcopper,69.6%forgold,and77.8%formolybdenuminthePebbleWestareaand89.3%forcopper,76.8%forgold,83.7%formolybdenuminthePebbleEastarea.



Page 7

The Preliminary Assessment describes and assigns potential economic value to three successivemine development cases comprising 25, 45 and 78 years of open pit mining and at a nominalprocessingrateof200,000tonsperday.Keyresultsinclude:

ForthePebbleProject,the45‐yearReferenceCaseyieldsa14.2%pre‐taxinternalrateofreturn("IRR"),a6.2‐yearpaybackon initialcapital investmentofUS$4.7billionandaUS$6.1billionpre‐taxnetpresentvalue("NPV")ata7%discountrateandlong‐termmetalpricesdefinedinthePreliminaryAssessmentas$2.50perpoundofcopper,$1,050perounceofgold,$13.50perpoundofmolybdenumand$15.00perounceofsilver.Atprevailingmetalpricesatthetimeofthe study, defined in the Preliminary Assessment as $4.00 per pound of copper, $1,350 perounceof gold, $15.00perpoundofmolybdenumand$28.00perounceof silver, the45‐yearReferenceCaseyieldsa23.2%pre‐taxIRR,a3.2‐yearpaybackoninitialcapitalinvestment2andaUS$15.7billionpre‐taxNPVata7%discountrate.

ForNorthernDynasty’s 50% share of the project, the 45‐yearReferenceCase yields an 18%pre‐tax and 15.4% post‐tax IRR, a 4.7‐year pre‐tax and 5.3‐year post‐tax payback on initialcapital investment and a US$3.6 billion pre‐tax and US$2.4 billion post‐tax NPV at a 7%discountrateandlong‐termmetalprices.Atprevailingmetalpricesatthetimeofthestudy,the45‐yearReferenceCaseyieldsa30.2%pre‐tax and 25.1% post‐tax IRR, a 2.6‐year pre‐tax and 3.1‐year post‐tax payback on initialcapitalinvestmentandaUS$8.3billionpre‐taxand$5.6billionpost‐taxNPVata7%discountrateforNorthernDynasty’s50%interest.

The45‐yearReferenceCaseproduces31billion("B")lbcopper,30million("M")ozgold,1.4Blbmolybdenum,140Mozsilver,1.2Mkgrheniumand907,000ozpalladiumwhileminingonly32%ofthemineralresource.

For the 45‐yearReference Case, cash costs per payable lb of copper after by‐product creditstotalminusUS$0.11.

The results of the Preliminary Assessment confirm that the Pebble Project has the potential togeneratesubstantialannualrevenues,withincreasinglybetterreturnsoverdecadesofproduction.

OngoingPrefeasibilityStudyandEnvironmentalandSocioeconomicWork

The Pebble Partnership has assembled an experienced engineering and permitting team for thePebble Project, consisting of more than 20 senior engineers and technical specialists (many ofwhomarefromtheAngloAmericangrouporNorthernDynasty),aswellasengineeringfirmsandspecializedconsultanciesfromaroundtheworld.

The team has continued to advance engineering and project design initiatives for the PebbleProject.PublicconsultationforumsinAlaskaareplannedtogaininputfromstakeholderspriortothecompletionofaPrefeasibilityStudyandthesubmissionofpermitapplications.

In January2012, thePebblePartnership released theEnvironmentalBaselineDocument ("EBD")for the Pebble Project, characterizing existing physical, biological and social conditions in theprojectarea,inanticipationofinitiatingprojectpermitting.Itcontainsmorethan27,000pagesofscientificdataandanalyses,characterizingabroadrangeofenvironmentalandsocialconditionsin

2 Initial capital expenditures for all three development cases are estimated at $4.7 billion, excluding capital costsassociatedwithoutsourcedpower,roadandportinfrastructure.



Page 8

southwest Alaska – including climate, water quality, wetlands, fish and aquatic habitat, wildlife,land and water use, socioeconomics and subsistence. The EBD is based primarily on researchcollected between 2004 and 2008, although baseline data collecting and monitoring ofenvironmentalandsocioeconomicconditionssurroundingthePebbleProjectcontinuetoday.

PermittingwillbeinitiatedoncethePebblePartnershipsubmitsitsProjectDescriptionandotherdocuments to the government agencies which, with the EBD, provides the foundation for anEnvironmental Impact Statement ("EIS"). Often prepared by a third‐party contractor under thedirection of a lead federal agency, the EIS will assess the project’s potentialenvironmental/socioeconomiceffectsanddevelopmentalternatives,andwillprovidethebasisforfederal,stateandlocalgovernmentagenciestomakeindividualpermittingdecisions.

WorkcontinuestowardcompletionofthePrefeasibilityStudy.PermittingunderNEPAisexpectedtobegintowardtheendof2012orearly2013withapublicconsultationprogramtoprecedethatprocess.

TheboardofthePebblePartnershiphasadoptedabudgetofapproximatelyUS$107millionforacomprehensivework program in 2012. The programwill include exploration, geotechnical andmetallurgical drilling and geo‐hydrological testing, engineering studies to complete a ProjectDescription in 2012 and Prefeasibility Study in 2013, continued environmental baseline datacollection, monitoring and synthesis, and community engagement and workforce developmentprogramstoadvancetheprojectandprepareforpermittingunderNEPA.

Corporate

Northern Dynasty has cash and cash equivalents on hand of $33.7million for its operatingrequirements. With thePebbleProjectbeing financedbyAngloAmerican,managementbelievesthat the Company has sufficient capital resources to cover its short to medium term cashrequirements.

1.2.1.2LimitedPartnershipEstablishedtoAdvancethePebbleProject

OnJuly26,2007,theCompanyconvertedawholly‐ownedgeneralpartnershipthathelditsPebblepropertyinterestsintoalimitedpartnership,thePebblePartnership.AngloAmerican,throughitswholly‐owned affiliate, subscribed for 50% of the Pebble Partnership's equity effective July 31,2007. TheCompany(throughawholly‐ownedaffiliate)andAngloAmericanhaveequalrights inthePebblePartnership.Tomaintainits50%interestinthePebblePartnership,AngloAmericanisrequired to commit staged cash investments into the Pebble Partnership aggregating to US$1.5billion.

Anglo American’s staged investment requirements include an initial minimum expenditure ofUS$125million(completedin2008)towardsaprefeasibilityreport.Theprefeasibilityreportistobe approved by the Board of the general partner (PebbleMines Corp.), and is to summarize allpreviousprefeasibilitystudies.TheBoardofthegeneralpartnerisalsotoapprovethealternativesforafinalFeasibilityStudy.AngloAmericanisrequired,inordertoretainits50%interestinthePebble Partnership, to commit within 90 days of the later of the receipt of the approvedprefeasibility report and the approved study alternatives, to fund further expenditures whichwould bring its total investment to at least US$450 million, which amount is to be expendedtowards producing a final feasibility study and related activities, the completion of which isexpectedtotakethePebblePartnershiptoaproductiondecision.Uponanaffirmativedecisionby



Page 9

thePebblePartnershiptodevelopaminefollowingapprovalofapositiveFeasibilityStudy,AngloAmericanisrequiredtocommittotheremainingportionofthetotalinvestmentofUS$1.5billioninorder toretain its interest in thePebblePartnership. Followingcompletionof theUS$1.5billionexpenditure,anyfurtherexpenditurewillbefundedbyAngloAmericanandtheCompany(throughits affiliate) on a 50:50 basis (subject to dilution for non‐contribution). The Pebble Partnershipagreementprovidesforequalprojectcontrolrightswithnooperator’sfeespayabletoeitherparty.

TheCompanydeterminedinaccordancewithIAS31,InterestsinJointVenturesthatitsinvestmentinthePebblePartnershipisaninterestinajointlycontrolledentity.TheCompanyappliestheequitymethodtoaccountforitsinterestinthePebblePartnership.

AngloAmerican’scashcontributionsincetheformationofthePebblePartnershiponJuly31,2007toJune30,2012amountsto$464.4million(US$444.4million).

ThecorporateofficeofthePebblePartnershipis locatedinAnchorage,Alaska. TheAlaska‐basedoperationsareguidedby theBoardof thegeneralpartnerwithequal representation fromAngloAmericanandNorthernDynasty.

1.2.1.3TechnicalPrograms

ExplorationandDrilling

Siteworkin2012isplannedtoincludeexplorationdrilling,hydrogeochemicalsamplingsurveystoaccessandprioritizenumerousgeophysicalexplorationtargetsontheproperty,soilsamplingandgeologicalandalterationmapping.

The2012drillingprogrambeganduringthesecondquarter. Over3,000feetofdrillinghadbeencompletedbyquarter‐end,includingtwocoreholes(bothinprogress)totaling2,178feettotestthewesternlimitsofthePebbledeposit;fiverotaryholes(oneinprogress)forgeotechnicalpurposes;andonesonichole(inprogress)forhydrogeologicalpurposes.

Engineering

The current phase of the engineering program is designed to advance toward completion of theprefeasibility study for the Pebble Project. The work, which commenced in 2011, continuedthroughthefirsthalfof2012andincludesadditionalanalysisoftheopenpit,ongoingdesignoftheprocess plant and associated infrastructure, and compilation of the designs for the access roads,port and power plant. Consistentwith its previous efforts, the Pebble Partnership continues toevaluate development options and component alternatives. The Pebble Partnership engineeringteam isalsomakingcontributions to thedevelopmentof aProjectDescription tosupportpermitapplicationsunderNEPA.



Page 10

EnvironmentalandSocioeconomicStudies

TheEnvironmentalBaselineDocument("EBD")wasreleasedinJanuary2012. TheEBDprovidesinformationandanalysisonbaselinephysical,chemical,biologicalandsocialconditionsbaseduponongoingdata collectionby thePebbleProject environmental study team from2004 to2008. Itspurpose is toprovide thepublic, regulatory agencies and thePebblePartnershipwith adetailedcompendiumofpre‐developmentenvironmentalandsocioeconomicconditionsintheprojectarea.

Research for the Pebble EBD was conducted by more than 40 respected independent researchfirms, utilizing over 100 scientific experts and engineering groups, laboratories and supportservices. Researcherswere selected for their specific areasof expertise andAlaskan experience,with cooperating government agencies participating in several studies. Information for the EBDwasgatheredthroughfieldstudies,laboratorytests,reviewofgovernmentrecordsandotherthird‐partysources,andinterviewswithAlaskaresidents.

The compilation of environmental studies undertaken in support of mine development is morecommonly presented to regulatory agencies as part of a broader permitting package, whichincludesaProjectDescription. GivenitsimportanceandthepublicinterestinthePebbleProject,thePebblePartnershipreleasedtheEBDtoprovidestakeholderswithadditionaltimetoreviewthesubstantialdocumentinadvanceofprojectpermitting.AProjectDescriptionforthePebbleProjectwillneedtobefinalizedbeforepermittingcommences.

PebblePartnership facilitated a four‐dayworkshopwith federal and state regulatory agencies inJanuary2012topresenttheEBDfindings.TheworkshopwasbroadcastpubliclyviatheInternet.AseriesofpublicpresentationshasalsobeencoordinatedinovertwentycommunitiesthroughoutsouthwestAlaskaandelsewherearoundtheStatetopresenttheEBDfindings.Thesepresentationsinvolvedseveraloftheauthorsofthedocument.

ComprehensiveenvironmentalandsocioeconomicbaselinestudyprogramscontinueatthePebbleProjectsite.The2012fieldprogramswillprimarilyfocusonsurfaceandgroundwaterhydrology,waterqualityandfishresources.

CulturalResourceStudies

CulturalresourcestudieshavebeencarriedoutbythePebblePartnershiponallareasthatmightbeaffectedbythePebbleProject,withtheexceptionofpossibleroadandportlocations.Examinationofthepotentialroadandportsiteswillbeundertakenonceadecisionismaderegardingtheexactlocationoftheseprojectfeatures.

CommunityEngagement

Anactiveprogramofstakeholderoutreachhascontinuedin2012,includingcommunitymeetings,stakeholdervisits,presentationsandeventappearances,aswellasstakeholdertourstothePebbleProject site and to operatingmines in the United States ("US") and Canada. The focus of theseoutreach activities is to update stakeholders on the Pebble Project, to receive feedback onstakeholderprioritiesandconcerns,andtoadviseparticipantsaboutmodernminingpractices.



Page 11

The Pebble Partnership has a number of other initiatives underway to enhance stakeholderrelationships,including:

1. ThePebbleFund forSustainableBristolBayFisheries&Communities–Establishedin2008witha five‐year,US$5millioncommitment, thegoalof thePebbleFund is toenhance thehealthandsustainabilityofregionalfisheriesandthecommunitiestheysupport.Grantsaredetermined based on criteria and selections made by an advisory board comprised ofcitizens fromcommunities throughout theBristolBay region. In2012, seventeen grants,totalingUS$540,835havefundedcommunity‐basedprojectsthroughoutsouthwestAlaska.Grants, totaling more than US$4.0million, have been awarded to date, leveraging nearlyUS$12.6millioninmatchingfundsfromotherorganizations.

The Bristol Bay Marketplace Business Idea Competition for residents of Bristol Baycommunities was introduced in 2011. The competition, sponsored by the PebblePartnership and the Pebble Fund, provides the opportunity for local entrepreneurs tocompetefor fundingtostartorexpandBristolBay‐basedbusinesses. InSeptember2011,five recipients were selected to receive US$215,000 in funding as part of the inauguralBristol BayMarketplace Business Idea Competition. A second round of awards, totalingUS$235,000,wasdispersedfortheperiodJanuarytoApril2012.

2. AnindependentstakeholderdialogueprocessconcerningthePebbleProjectwasinitiatedinlate 2010 by the Keystone Center – a non‐profit organization specializing in facilitatingstakeholder‐driven consultation processes concerning contentious, science‐based issues.IndependentSciencePanels(“ISP”),consistingofrespectedexpertsinarangeoftechnical,scientific and sociological fields, are being assembled to review environmental andsocioeconomic data compiled by the Pebble Partnership for the purpose of projectengineeringandpermitting,whileprovidingexpert insighttoPebbleProjectstakeholders.Four ISP events are planned for the fall 2012 to address: geology and geochemistry;hydrology andwater quality; fish,wildlife and habitat; and social, economic and culturaldynamics.

During the summer 2012 site work season, twenty‐six site tours have been provided to shareproject updates with stakeholders from across the region and Alaska. In addition, the PebblePartnership continues to host regional stakeholders at tours of operating mines: a tour to theBinghamCanyonMineinUtahwasheldinJune.InordertoincreasestakeholderunderstandingofthePebbleProject,thePebblePartnershiphascommissionedaNationalEconomicInputStudy.AsthePebble Project advances toward the completion of a prefeasibility study andpreparation forproject permitting under NEPA, it is expected that the Pebble Partnership will initiate a broad‐basedpublicconsultationprogramto involvestakeholders in theprocessbywhich theproject isbeingdesigned.

EmploymentandWorkforceDevelopment

ThePebblePartnershipisoneofthemostimportantprivatesectoremployersinsouthwestAlaska.Alaskansmadeupover70%of thesiteworkforce in2011,andthis includedemploymentof133peoplefromtheBristolBayregion.

Employee training and workforce development initiatives continue to expand. Workforcedevelopment initiatives at the Pebble Project include the provision of training in the areas of



Page 12

equipment operations, health, safety and environment. Working with the U.S. and AlaskaDepartments of Labor, the Pebble Partnership has established the first‐ever registeredapprenticeshiptrainingprogramtohelplocaldrillhelpersbecomecertifieddrillers.TheCompanyis also investing in programs to train local workers to become environmental technicians,emergencymedical technicians and bear guards. In addition, scholarships are available to highschoolstudentsfromtheBristolBayregionwhoareinterestedinpursuingstudiesatcollegeandvocational/technical schools in the fields of project management, operations, geology, science,engineeringandotherdisciplinesrelatedtoresponsibleresourcedevelopment.

1.2.1.4LegalMatters

OnFebruary23,2011, theCompany issuedanewsreleaseannouncingthat itwas inreceiptofanewindependentPreliminaryAssessmentofthePebbleProject,whichisbasedontheinformationgenerated and provided by the Pebble Partnership and Northern Dynasty. The informationprovidedbythePebblePartnershipandthePreliminaryAssessmentconstituteamaterialchangeintheaffairsoftheCompanybecauseitchangedthetechnicalparametersandprovidedanestimatednetpresentvalueofthepropertythatdeviatedbybillionsofdollarsfromthelastsuchassessmentdonein2004.AngloAmerican,theCompany’s50%partnerinthePebblePartnership,hasassertedthat the news release contained confidential information which is the property of the PebblePartnershipandwasnotauthorizedtobereleased,andAngloAmericanreservesallrightstoclaimthat thereleasehasdamagedAngloAmericanand/or thePebblePartnership. TheCompanyhasreceived legal advice that the news release was a permitted disclosure under the variousagreementswithAngloAmerican,anditsissuancewasamandatoryrequirementunderCanadianandUSregulatoryrequirements.TheCompanydoesnotbelievethatAngloAmerican’sallegationshave any merit; however, it cannot give assurances about future events or actions by AngloAmerican.InFebruary2011,theUSEnvironmentalProtectionAgency("EPA")announceditwouldundertakea Bristol BayWatershed Assessment study focusing on the potential effects of large‐scale minedevelopmentinalloftheBristolBayarea,thenforNushagakandKvichakdrainages.ThisprocesswasinitiatedinresponsetocallsfrompersonsandgroupsinoppositiontothePebbleProjectfortheEPAtopre‐emptivelyuse itsassertedauthorityunderSection404cof theCleanWaterActtoprohibitdischargesofdredgedorfillmaterial inwatersoftheUSwithinthesedrainages. Ratherthan acceding to this request, the EPA has embarked on a scientific study to assess potentialimpactsofhardrockmininginthetwodrainages.TheBristolBayWatershedAssessmentprocessisexpectedtoconcludeinlate2012.TheEPA’sdraftBristolBayWatershedAssessment("BBWA")reportwasreleasedonMay18,2012.Thedraftreportisafundamentallyflaweddocument.BytheEPA’sownadmission,ithasevaluatedtheeffectsofa ‘hypotheticalproject’–aproject thathasnotbeendefinedorproposed–and forwhichkeyenvironmentalmitigationstrategiesarenotknown. Theassessmentwasrushed–itisbasedonstudiesconductedoveronlyoneyearinanareaof20,000squaremiles. Incomparison,thePebblePartnershiphasstudiedtheecologicalandsocialenvironmentsurroundingPebble formorethaneightyears.ItalsofailedtofullyconsiderthedatathatthePebblePartnershipprovidedaspartofits27,000‐pageEnvironmentalBaselineDocument.The EPA has called for public comment on the draft charge it has provided to peer reviewersassembled to assess the quality and sufficiency of scientific information presented in the draftBBWAreport.Inresponse,NorthernDynastymadeapresentationhighlightingtheseshortcomings



Page 13

atthepublichearingsheldinSeattle,Washington,onMay31,2012,andinlateJune2012,madeasubmission to the EPA stating its concerns about the peer review process. In July 2012, theCompanyalso submitteda635‐page critiqueof thedraft report in response to theEPA’s call forpublic comment, andhascalledupon theEPA toceaseactionon thewatershedassessmentuntilsuch time as the Pebble Partnership submits a definitive proposal for the development of thePebble deposit. Evidence provided in Northern Dynasty’s submission to the EPA demonstratesthat:

• thedraftassessmentemploysaflawedriskandimpactassessmentmethodology,andfailstomeettheEPA’sownguidelinesforsuchstudies;

• thedraftassessmentpresentsnumerous,seriouserrorsoffactandomission;• the draft assessment uses wholly inappropriate case studies, comparing the future

environmentalperformanceofthePebbleProjecttominesbuiltinthe1800sandinforeigncountrieslikeRomania,ratherthanmodernminesintheUS;

• the draft assessment fails to consider reliable and comprehensive sources of data, andspecificallyoverlooksthemorethan$120millioninenvironmentalstudiessummarizedinthe Pebble Partnership’s Environmental Baseline Document, which represents the mostexhaustiveandcomprehensivedatasetavailableintheregion;

• the draft assessment presents a selective and misleading analysis of the Bristol Bayeconomy, and entirely fails to consider the positive benefits that responsible mineraldevelopment could deliver to a region suffering from significant out‐migration, highunemploymentandoneofthehighestcostsoflivingintheUS;

• thedraftassessmenthasbeenrushed,evaluatingaregionofsome20,000squaremiles inlittle over a year where previous watershed studies have taken many years to evaluatemuchsmallerlandareas;

• thedraft assessment is inappropriatebecause it seeks to evaluate the effectsof aprojectbeforeithasbeenproposed,andbeforesite‐specificmitigationforpotentialenvironmentaleffectsareknown;and

• the draft assessment evaluates the potential effects of a “hypothetical mine scenario” asdeterminedbytheEPA,eventhoughthisscenariocouldnotbepermittedunderfederalandstatelaw.

NorthernDynastywillcontinuetoparticipateintheprocessbywhichthedraftBBWAreportwillbefinalized.InOctober2011,alawsuitfiledinJuly2009bytheTrusteesforAlaska(anenvironmentallawfirm)onbehalfofNunamtaAulukestai–anorganizationestablishedandfundedtoopposedevelopmentofthePebbleProject‐wasrejectedbytheAnchorageSuperiorCourt.ThelawsuitallegedthattheAlaskaDepartment ofNaturalResources ("DNR") had violated the state constitution by grantingexplorationandtemporarywaterusepermitstothePebblePartnership,andexplorationactivitieshad caused harm to vegetation, water, fish and wildlife. The Pebble Partnership activelyparticipated in the trial proceedings after being granted intervener status. SuperiorCourt JudgeAarsethdeniedeachoftheallegationsmadebyNunamtaAulukestai,andruledthatnoevidenceofenvironmentalharmwaspresented.TheplaintiffshavefiledanappealthatisnowpendingbeforetheAlaskaSupremeCourt.InNovember2011,byanarrow280–246(53%–47%)margin,votersinSouthwestAlaska’sLake&PeninsulaBoroughsupportedaballotmeasuresponsoredbyanti‐Pebbleactiviststhat,ifupheldby the courts,might restrict future development that affectsmore than one squaremile of landwithinthe31,000squaremileborough.



Page 14

The initiative was opposed by a broad spectrum of Alaska interests, including a group of fourAlaska Native village corporations representing seven Lake & Peninsula Borough communitieswhoseprivatelandholdingswouldbeaffectedbytheordinance,theStateofAlaskaandthePebblePartnership.ItwasalsoopposedbytheResourceDevelopmentCouncilforAlaska,theAlaskaStateChamberofCommerce,theAlaskaMinersAssociation,CouncilofAlaskaProducers,theAlaskaOilandGasAssociationandtheAlaskaIndustrySupportAlliance,amongothers.The Pebble Partnership and the State of Alaska view the initiative as unconstitutional andunenforceable because it seeks to restrict development of state‐owned resources on state landsthrough amunicipal ordinance. The State of Alaska and the Pebble Partnership have filed legalchallenges in theAlaska SuperiorCourt,whichheldhearingson thematter earlier this year andscheduledatrialontheissueforFebruary2013.

1.2.2 OtherProperties

1.2.2.1SouthPebble,SPandKAKClaims

AgreementbetweenFullMetalMineralsandthePebblePartnership

OnJanuary31,2012,thePebblePartnershipenteredintoaLimitedLiabilityCompanyAgreement(the "FMMAgreement")ofKaskanakCopperLLC(the "LLC")withFullMetalMinerals (USA) Inc.("FMMUSA"),awholly‐ownedsubsidiaryofFullMetalMineralsCorp.UndertheFMMAgreement,the Pebble Partnership can earn a 60% interest in the LLC which owns 100% of FMM’s SouthPebble Claims (the "FMM Properties"), by incurring exploration expenditures of at least US$3millionandmakingannualpaymentsofUS$50,000toFMMUSAoveraperiodendingonDecember31,2013.ThePebblePartnershiphasbeenappointedasthemanageroftheLLCandwillcontinueasmanageruntilitresignsorisdeemedtoresignincertaindefinedcircumstanceswhichincludeareductionofitsownershipinterestintheLLCtobelow50%.

Forthedurationoftheearn‐inperiodandthetermofthePebblePartnership’smembershipintheLLC,thePebblePartnershipwillhaveanoptiontoselectandpurchaseclaimsthatformpartoftheFMM Properties (the "Purchased Claims") at a price of US$25 per acre payable to FMMUSA,provided that thePurchasedClaims aredeclaredor agreed tobeoutsideof the current scopeofoperationsoftheLLC,constitutenomorethan20,000acres,constituteacontinuousblockofclaimsandarelocatedoutsidean"ExclusionArea"specifiedintheFMMAgreement.

TheFMMPropertiestotal542claimscoveringapproximately135squaremileslocatedwestofthegroundheld100%bythePebblePartnership;99oftheseclaims,coveringanareaof24.3squaremiles,formthe"ExclusionArea".

1.2.2.2BigChunkNorthandSouth

NorthernDynasty’sPurchaseandOptionAgreementwithLibertyStar

On June 29, 2010, Northern Dynasty entered into an agreement with Liberty Star Uranium andMetals Corp. and its subsidiary, Big Chunk Corp. (together, "Liberty Star"), pursuant to whichLiberty Star sold 23.8 square miles of claims (the "Purchased Claims") to a US subsidiary ofNorthernDynastyinconsiderationforbothaUS$1millioncashpaymentandasecuredconvertible



Page 15

loan from Northern Dynasty in the amount of US$3million which accrues interest at 10% perannum compounded monthly (the "Loan"). The parties agreed with effect from November 14,2011,toincreasetheprincipalamountoftheLoanbyUS$714,374(the"AdditionalLoanAmount"),beingtheamountsexpendedbyNorthernDynastytodateonannualassessmentwork,rentalandrelatedfeesrelatingtoLibertyStar’sclaimsinAlaska.TheLoanisrepayable,incashondemandorconvertibleintoLibertyStarsharesattheelectionofNorthernDynasty,afterNorthernDynastyhasspentatleastaminimumamount(the"MinimumExpenditure")earningintoajointventure(whichhasnotyetbeenformed–seethediscussionbelow).TheMinimumExpenditurewasoriginallysetatUS$1million,butthepartiessubsequentlyagreedonNovember14,2011toreducetheMinimumExpenditureby theAdditionalLoanAmountplus interest incurred thereon. Asof June30,2012,theMinimumExpenditurehasbeenreducedtoUS$228,437.ThePebblePartnershiphadtherighttoacquirethePurchasedClaimsforaperiodoftimebutdeclinedtoexercisethatright.

In addition, subject to negotiating and signing a definitive earn‐in option and joint ventureagreement,NorthernDynastywill be able to earna60% interest inLibertyStar’s remainingBigChunkpropertiesinAlaskabyspendingUS$10milliononthosepropertiesoversixyears.TheLoanmaybeappliedaspartoftheearn‐inrequirements,atNorthernDynasty’sdiscretion.AsofthedateofthisMD&A,NorthernDynastyandLibertyStarhavenotenteredintoajointventureagreement.

Thetotalareaofthepropertiesis172.7squaremiles,andincludes95PurchasedClaims;428BigChunkSouthclaims(102.9squaremiles)and184BigChunkNorthclaims(46squaremiles).AlloftheseclaimsarelocatedinthevicinityofPebble.NorthernDynastycarriedoutinitialexplorationsurveysin2010.

1.2.3 MarketTrends

Copper prices showed a significant increase between late 2003 andmid‐2008, and after a steepdeclineinlate2008andearly2009,steadilyincreaseduntillate2011.Thepriceofcopperin2012hasdecreasedfromtheaveragepricein2011.

Althoughgoldpriceshavedroppedfromtimetotime,overthepastfiveyearstheaverageannualprice has steadily increased. This overall trend continues in 2012: although prices have beenvariable,theaveragepriceintheyeartodatehasincreasedovertheaveragepricein2011.

Molybdenumprices havebeenmore volatile than gold or copper, beginning anupward trend in2003 that reached a peak ofUS$34/lb inOctober 2005, decreasing through 2006, then rising in2007untilthelatterpartof2008,whentheydroppedsignificantly.ThisdecreasecontinueduntilMay2009.Pricesimproved,butwerevariablein2010and2011.Theaveragepricehasdecreasedin2012.

Averageannualpricesaswellastheaveragepricesofarin2012forcopper,goldandmolybdenumareshowninthetablebelow:



Page 16

YearAveragemetalprice(US$)

Copper Gold Molybdenum2008 3.16/lb 871/oz 29.70/lb2009 2.34/lb 974/oz 11.29/lb2010 3.42/lb 1,228/oz 15.87/lb2011 4.00/lb 1,572/oz 15.41/lb

2012(tothedateofthisMD&A) 3.63/lb 1,641/oz 13.84/lb

Source:LMEOfficialCashPriceasprovidedatwww.metalprices.com



Page 17

1.3 NotUsed

1.4 SummaryofQuarterlyResults

Allmonetaryamountsareexpressedinthousandsofdollarsexceptpershareamountsandwhereotherwiseindicated.Minordifferencesareduetorounding.

StatementsofFinancialPosition

Jun302012

Mar312012

Dec312011

Sep302011

June302011

Mar312011

Dec312010

Sep302010

Explorationandevaluationassets $1,055 $1,055 $1,055 $1,055 $1,055 $1,055 $1,055 $1,055

InvestmentinPLP 101,652 99,595 101,542 104,658 96,301 96,810 99,306 102,741

Currentassets 38,605 40,811 42,644 43,792 44,925 45,302 43,886 43,421

Totalassets 141,312 141,461 145,241 149,505 142,281 143,167 144,247 147,217

Equity 137,191 137,282 141,356 145,550 138,566 139,261 140,060 143,287

Deferredincometax 3,719 3,643 3,715 3,829 3,523 3,542 3,633 3,737

Currentliabilities 402 536 170 126 192 364 554 193Totalshareholders’

equityandliabilities 141,312 141,461 145,241 149,505 142,281 143,167 144,247 147,217

Workingcapital 38,203 40,275 42,474 43,666 44,733 44,938 43,332 43,228 Comprehensive(Income)Loss

Expenses

Explorationandevaluation 1,274 1,269 (86) 448 141 316 850 653

Generalandadministrative 1,049 1,178 1,615 871 2,146 1,478 1,017 1,177

Share‐basedcompensation 1,702 1,777 2,170 2,752 2,782 6,501 1,588 1,543

Interestincome (251) (163) (270) (252) (225) (197) (198) (175)

Lossbeforetax 3,774 4,061 3,429 3,819 4,844 8,098 3,257 3,198Incometaxexpense(recovery) – – (51) – – – 21 41

Lossforthequarter 3,774 4,061 3,378 3,819 4,844 8,098 3,278 3,239Loss(gain)onmarketable

securities – 1 – – – 1 (1)Exchangedifferenceon

translationofthePebblePartnership (2,057) 1,947 3,116 (8,357) 509 2,496 3,435 3,554

Deferredincometax 76 (72) (114) 306 (19) (91) (124) (129)Comprehensiveloss(income) $1,793 $5,936 $6,381 $(4,232) $5,334 $10,503 $6,590 $6,663 Basicanddilutedloss

percommonshare $0.04 $0.04 $0.04 $0.04 $0.05 $0.09 $0.03 $0.03



Page 18

DiscussionofQuarterlyTrends

TheCompany’sinvestmentinthePebblePartnershipiscarriedinUSdollars.ExchangedifferencesarisingfromthetranslationoftheGroup’sinvestmentinthePebblePartnershiparetakendirectlyto the foreign currency translation reserve through other comprehensive loss. The US dollardepreciatedagainsttheCanadiandollarineachquarterotherthaninQ2of2012andQ3of2011.Asaresult,theCompanyrecordedexchangelossesinallbutthepreviouslymentionedquartersinother comprehensive loss. This resulted in a decrease in the carrying value of the Company’sinvestment in the Pebble Partnership on the statements of financial position over the samecorresponding period. The following table summarizes the movement in the US dollar to theCanadiandollarandtheresultingexchangedifferencesrecognizedineachquarter:

1CADfor1USDPeriod USDmovementtoCAD Start End Recognized(gain)lossQ32010 Depreciation $1.06 $1.03 $3.6millionQ42010 Depreciation $1.03 $0.99 $3.4millionQ12011 Depreciation $0.99 $0.97 $2.5millionQ22011 Depreciation $0.97 $0.96 $0.5millionQ32011 Appreciation $0.96 $1.05 $(8.4)millionQ42011 Depreciation $1.05 $1.02 $3.1millionQ12012 Depreciation $1.02 $1.00 $1.9millionQ22012 Appreciation $1.00 $1.02 $(2.1)million

Share‐basedcompensationexpensealsotypicallyfluctuatesbasedonthetimingofsharepurchaseoptiongrantsandthevestingperiodsassociatedwiththesegrants.Thefairvalueofsharepurchaseoptions is determined at the grant date and the compensation expense for each tranche isrecognizedovertheperiodduringwhichthesharepurchaseoptionsvest. TheCompanygrantedsharepurchaseoptionsinQ2of2012andQ1of2011.Thisresultedinanincreaseinshare‐basedcompensationrecognizedinQ1of2011.InQ2of2012,share‐basedcompensationdidnotincreasenotwithstandingthevestingofone‐halfofthesharepurchaseoptionsgranted,asthefairvalueofsharepurchaseoptionsgrantedwas$0.87ascomparedto$6.57fortheQ12011grant.FromQ3toQ4 of 2010, Q2 to Q4 of 2011, and Q1 of 2012 share‐based compensation related to theamortizationofshare‐basedcompensationonsharepurchaseoptionsthatwerestillvesting.InQ1of 2011 share‐based compensation was also impacted by the vesting of one‐third of the sharepurchaseoptionsgrantedwithanexercisepriceof$15.44whichresultedinalargerexpenseinQ12011comparedtotheloweramortizationofremainingfairvaluefromQ22011toQ1of2012.

ExplorationandevaluationexpensesincreasedfromQ3toQ4of2010astheCompanyconductedtwo independent studies, initiatedwork on the Preliminary Assessment Technical Report ("PA")andcompletedexploratoryworkontheLibertyStarclaims.In2011,theCompanycompletedthePA, conducted further ongoing analysis thereof and paid annual fees and rentals on Liberty Starclaims. InQ4 of 2011, the Company agreed to treat certain of the 2011 payments in respect toLibertyStarclaimsasanadvanceandincreasedtheprincipalamountoftheloanoutstandingfromLibertyStar resulting in a credit in exploration costs for thequarter. InQ1andQ2of2012, theCompanycommencedand focusedona further technicalstudy toadvanceworkcompletedsincetheissueofthe2011PA.



Page 19

1.5 ResultsofOperations

ThefollowingfinancialdatahasbeenpreparedinaccordancewithIFRSasissuedbytheIASBandinterpretations of the IFRS Interpretations Committee (IFRICs) effective for the period endedJune30,2012andareexpressedinCanadiandollarsunlessotherwisestated.

TheCompany’soperationsandbusinessarenotdrivenbyseasonal trends,but ratheraredriventowards the achievement of project milestones relating to the Pebble Project such as theachievement of various technical, environmental, socio‐economic and legal objectives, includingobtaining the necessary permits, the completion of pre‐feasibility and final feasibility studies,preparationofengineeringdesigns,aswellasreceiptof financingsto fundtheseobjectivesalongwithmineconstruction.

1.5.1 ResultsofOperationsfortheThreeMonthsEndedJune30,2012vs.2011

TheCompanyrecordedalossof$3.8millionforthecurrentquarterascomparedto$4.8millioninthesameperiodin2011.Thedecreasewasmainlyattributabletolowershare‐basedcompensationand general and administrative expenses being recorded offset by higher exploration relatedexpensesinthecurrentquarterascomparedtothe2011comparativeperiod.

TheCompanyrecordedexplorationcostsof$1.3millioninQ22012ascomparedto$0.1millioninQ22011astheCompanycontinuedworkingonatechnicalstudytoadvanceworksincetheissueofthe2011PreliminaryAssessment.

Generalandadministrativeexpenses("G&A")decreasedto$1.0million in2012from$2.1millionIn2011,G&Awasimpactedbythedonationofcompanysharesinthequarter.Thefollowingtableprovidesabreakdownoftheexpensesincurred,expressedinthousandsofdollars:

Generalandadministrativeexpenses 2012 2011

Conferenceandtravel $90 $25

Donations – 866

Insurance 84 68

Legal,accountingandaudit 36 41

Officecosts 237 308

Salaries 558 676

Shareholdercommunication 87 97

Trustandfiling 44 48

Foreignexchangeloss(gain) (87) 17

Total $1,049 $2,146

Salarieswere lower in the quarter as compared to Q2 2011 because the Company in 2011 hadcompletedandissuedanindependentPreliminaryAssessmentTechnicalReportandincurredcostsrelatingtothepreparationandanalysisthereof.

Share‐based compensation decreased to $1.7million from $2.8million in 2011. Although theCompanygranted2.2millionsharepurchaseoptionsinthecurrentquarter(noneinQ22011)ofwhichonehalfvestedimmediately,duetoalowersharepricein2012,thefairvalueestimatedwas$0.87peroptionascomparedtotheQ12011grantof$6.57peroption.Asaresultthefairvalue



Page 20

expenserecognizedwaslessthantheamortizationofshare‐basedcompensationrecognizedinQ2of2011.

Comprehensive lossdecreased to$1.8million in thequarter from$5.3million inQ22011due totheCompanyrecordinga$2.1millionexchangegainontranslationoftheinvestmentinthePebblePartnership as a result of the appreciation of the US dollar against the Canadian dollar fromapproximately1USD=1.00CADatApril1,2012to1USD=1.02CADatJune30,2012.TheCompanyrecognizedalossof$0.5 millioninthecomparableperiodof2011whentheUSdollardepreciatedfrom1USD=0.97CADatApril1,2011to1USD=0.96CADatJune30,2011.

1.5.2 ResultsofOperationsfortheSixMonthsEndedJune30,2012vs.2011

TheCompanyrecordedalossof$7.8millionforthecurrentperiodascomparedto$12.9millionin2011. Thedecreasewasmainlyattributabletolowershare‐basedcompensationandgeneralandadministrative expenses being recognized offset by higher exploration related expenses in thecurrentperiodascomparedtothe2011comparativeperiod.

The Company recorded exploration costs of $2.5million in the current period as compared to$0.5millioninthecomparative2011periodastheCompanycommencedworkonatechnicalstudythatadvancesworkthatwasundertakensincetheissueofthe2011PreliminaryAssessment.

G&Adecreasedto$2.2millionin2012from$3.6millionin2011.Thedecreasewasduemainlytolowercorporateactivityinthecurrentperiodascomparedto2011whentheCompanyissuedthe2011 Preliminary Assessment. Additionally in 2011, costs were impacted by the donation ofCompanyshares.Thefollowingtableprovidesabreakdownoftheexpensesincurred,expressedinthousandsofdollars:

Generalandadministrativeexpenses 2012 2011

Conferenceandtravel $207 $128

Donations – 866

Insurance 167 135

Legal,accountingandaudit 47 94

Officecosts 410 505

Salaries 1,023 1,298

Shareholdercommunication 178 273

Trustandfiling 200 229

Foreignexchangeloss(gain) (5) 96

Total $2,227 $3,624

Share‐based compensation decreased to $3.5million from $9.3million in 2011. Although theCompany granted 2.2million share purchase options, the same number as for 2011, due to thelowersharepricein2012,thefairvalueestimatedwas$0.87peroptionascomparedto$6.57peroptionforthe2011grant.Asaresultthefairvalueexpenserecognizedwaslowerthanfor2011.

Comprehensive loss decreased to $7.7million in the period from $15.8million in 2011 as theCompanyrecordedanexchangegainof$0.1millionfortheperiodontranslationoftheinvestmentinthePebblePartnershipthroughothercomprehensivelossascomparedtoalossof$3.0millionrecordedin2011. AsthePebblePartnershiphasaUSdollarfunctionalcurrency,theCompanyis



Page 21

impactedbymovementsintheUS/Canadiandollarexchangerate(see1.4,DiscussionofQuarterlyTrends).

1.5.3 CashFlowsfortheSixMonthsEndedJune30,2012vs.2011

Netcashusedinoperationsincreasedto$4.1millioninthecurrentperiodfrom$3.3millionintheprior comparative period. The increase was due to the increase in exploration and evaluationexpensesincurredin2012onadditionaltechnicalstudiessincethe2011PreliminaryAssessment.

TheCompanyreceived$0.2millionininterestoncashbalanceswhichwasmarginallylowerthanin2011duetoloweraveragecashbalancesheld.

TheCompanyalsoincreasedcashresourcesby$85,000in2012ontheexerciseofsharepurchaseoptions.In2011theCompanyraised$4.2millionontheexerciseofsharepurchaseoptions.

1.5.4 FinancialpositionasatJune30,2012vs.December31,2011

TheCompany’stotalassetsdecreasedto$141.3millionfrom$145.2million.Thedecreasewasduemainlytothedecreaseincurrentassetsof$4.0millionoffsetbytheincreaseinthecarryingvalueof the Company’s investment in the Pebble Partnership as a result of the exchange gain of$0.1million recognized on translation (refer 1.5.1). Cash and cash equivalents decreased by$3.8millionastheCompanyutilized$4.1millionofitscashinitsoperationsandreceivedinflowsfrom the exercise of share purchase options and interest on cash balances totaling $0.2million.Related party receivables decreased by $0.5million due to the utilization of services from therelatedpartybytheCompany.Amountsreceivableandotherassetsincreasedby$0.2millionduemainlytoaccruedinterest.

1.5.5 InvestmentinthePebblePartnership

As indicated insection1.2.1.2, theCompanyhasdetermined that, inaccordancewith IFRS, ithasjointcontrolofthePebblePartnershipandappliestheequitymethodtoaccountforitsinvestmentinthePebblePartnership.

ExpendituresincurredbythePebblePartnershiponthePebbleProjectarebeingfunded100%byAnglo American. Anglo American’s total contributions from inception to June30,2012 total$464.4million (US$444.4million). For the period ended June30,2012, the Pebble Partnershipincurredlossesof$39.7million(2011–$29.2million).Explorationcostsincreasedto$34.7millionfrom$26.2million in thecomparativeperiodof2011as thePebblePartnership focusedonworktoward the completion of a prefeasibility study for the Pebble Project. As well the PebblePartnership released the EBD in February 2012. Themain exploration expenditures during theperiodendedJune30,2012,werefor:

engineering(2012–$11.0million;2011–$5.1million); environmentalplanningandtesting(2012–$7.9million;2011–$5.6million); siteactivities(2012–$9.0million;2011–$10.3million); corporateaffairs(2012–$7.3million;2011–$5.2million);and businessdevelopment(2012‐$0.5million;2011‐$nil).

ForfurtherdiscussiononexplorationactivitiesandthetechnicalprogramsunderwayonthePebbleProject,seesection1.2.1.3,TechnicalPrograms.



Page 22

1.6 Liquidity

Historically, the Company's sole source of funding has been the issuance of equity securities forcash,primarilythroughprivateplacementstosophisticatedinvestorsandinstitutions.In2008,theCompanycompleteditslastprivateplacementfinancingandsincethenhascontinuedeachyeartoseeinflowstothetreasurythroughtheissueofcommonsharespursuanttotheexerciseofsharepurchase options. The Company's access to financing is always uncertain. There can be noassuranceofcontinuedaccesstosignificantequityfunding.

ThefundingofexpendituresonthePebbleProjectheldthroughthePebblePartnershipiscurrentlybeingprovidedbyAngloAmerican(describedbelow).ExcludingcashandcashequivalentsinthePebblePartnership,NorthernDynastyhas$33.7million in cashand cashequivalents for itsownoperatingrequirements.WiththePebbleProjectfundedbyAngloAmerican,theCompanybelievesithassufficientresourcestocoveritsshorttomediumtermcashrequirements.

Asdiscussedinsection1.2.1.2,theCompanyisina50:50limitedpartnershipwithAngloAmerican.Tomaintainits50%interestinthePebblePartnership,AngloAmericanisrequiredtomakestagedcash investments into the Pebble Partnership aggregating to US$1.5 billion. Anglo Americancompleted the initial US$125million commitment to fund prefeasibility study expenditures in2008. After approval of the prefeasibility report, in order to retain its 50% interest, AngloAmericanisrequiredtocommittofurtherexpenditureswhichwillbringitstotalinvestmenttoatleast US$450million, which amount is to be expended producing a final feasibility study and inrelated activities, the completion of which may take the Pebble Partnership to a productiondecision.Uponanaffirmativedecisiontodevelopamine,AngloAmericanisrequiredtocommittotheremainingportionofthetotalinvestmentofUS$1.5billioninordertoretainits50%interestinthePebblePartnership. On completionof theUS$1.5billion investmentbyAngloAmerican, anyfurtherexpenditurewillneedtobefundedbytheCompanyandAngloAmericanona50:50basis.The Company currently does not have the required funding tomeet these long term obligationsshouldtheyarise.

AtJune30,2012,theCompanyhadworkingcapitalofapproximately$38.2millionascomparedto$42.5millionatDecember31,2011.

TheCompanyhasno long termdebt, capital leaseobligations,operating leasesoranyother longtermobligations.

The Company has no "Purchase Obligations", defined as any agreement to purchase goods orservicesthatisenforceableandlegallybindingontheCompanythatspecifiesallsignificantterms,including: fixed or minimum quantities to be purchased; fixed, minimum or variable priceprovisions;andtheapproximatetimingofthetransaction.

ThePebblePartnershiphaspurchaseordersforgoodsandservicesrelatingtoitsactivitiesonthePebble Project. It also is responsible for allmaintenancepayments on theproperty and routineofficeleases.AllcostsarefundedthroughexistingcashresourcesinthePebblePartnershipwhicharebeingfundedbyAngloAmericanandareinthenormalcourseofoperations.

TheCompanyisresponsibleforallmaintenancepaymentsonthePurchasedClaims(refer1.2.2.2).SubjecttoenteringintoadefinitivejointventureagreementwithLibertyStar,whichasofthedateof thisMD&A has not yet occurred, the Companywould be required to spend US$10million inexplorationandclaimsmaintenanceover6years.



Page 23

1.7 CapitalResources

TheCompanyhasnolong‐termdebtandhad94,995,764commonsharesissuedandoutstandingatJune30,2012.

TheCompanyhadnocommitmentsformaterialcapitalexpendituresasofJune30,2012.

The Pebble Partnership, which is being funded by Anglo American, has an approximateUS$1.0million commitment to the Pebble Fund for Sustainable Bristol Bay Fisheries &Communitiesuntil2013(refertoCommunityEngagementin1.2.1.3).

TheCompanyhasnolinesofcreditorothersourcesoffinancing.

1.8 Off‐BalanceSheetArrangements

None.

1.9 TransactionswithRelatedParties

TheCompanyanditssubsidiariestransactwithHunterDickinsonServicesInc.("HDSI"),aprivatecompanywhichhas certaindirectors andother keymanagementpersonnel andwhomare closebusiness associates that are also key management personnel of the Company. Pursuant to amanagement services agreement with HDSI, HDSI provides geological, corporate development,administrative andmanagement services to the Company at annually set rates and incurs thirdpartycostsonbehalfoftheCompanywhicharereimbursedbytheCompanyatcost.

CostsforservicesrenderedbyHDSItotheCompanyforthesixmonthperiodendedJune30,2012were$1.5millionascomparedto$1.7millionforthecomparativeperiodin2011.Thedecreaseismainly due to the decrease in the Company’s use of HDSI personnel in the current period ascomparedto2011whentheCompanyrequiredadditionalresourcestoassistwiththecompletionofthe2011PreliminaryAssessment.TheCompanycontinuestouseresourcesprovidedbyHDSItoassist with ongoing administration and management of the Company including continuousdisclosureobligations,shareholdercommunicationsandinvestorrelations,aswellasassistingwiththeCompany’sroleaspartnerinthePebblePartnership.ThecostsforexpensespaidbyHDSIandreimbursedbytheCompanyfortheperiodendedJune30,2012were$0.8millionascomparedto$0.5millionfortheperiodendedJune30,2011.

Compensationpaid tokeymanagementpersonnel (directorsandseniormanagementcomprisingthe Senior Vice President, Corporate Development; Vice President ("VP"), CorporateCommunication, VP, Engineering and VP, Public Affairs) for the six month period endedJune30,2012 comprised salaries of $0.8million (2011 – $0.8million) and share‐basedcompensationof$1.7million(2011–$4.9million).

The Company also paid for services amounting to $21,000 provided to the Pebble PartnershipwhicharetobereimbursedatcostbythePebblePartnershiptotheCompany.



Page 24

1.10 NotUsed

1.11 ProposedTransactions

There are no proposed asset or business acquisitions or dispositions, other than those in theordinarycourse,beforetheBoardofDirectorsforconsideration.

1.12 CriticalAccountingEstimates

The Company's significant accounting policies are presented in Note 2 in the notes to theconsolidated financial statements for theyear endedDecember31,2011. Thepreparationof theinterimfinancialstatementsrequiresmanagementtomakeestimatesandassumptionsthataffectthe reported amounts of assets and liabilities at the end of the reporting period presented andreported amounts of expenses during said reporting period. Actual outcomes could differ fromthese estimates. The consolidated financial statements include estimateswhich, by their nature,areuncertain. Theimpactsofsuchestimatesarepervasivethroughouttheconsolidatedfinancialstatements, andmay require accounting adjustments based on future occurrences. Revisions toaccountingestimatesarerecognizedintheyearinwhichtheestimateisrevisedandfutureyearsifthe revision affects both current and future years. These estimates are based on historicalexperience, current and future economic conditions and other factors, including expectations offutureeventsthatarebelievedtobereasonableunderthecircumstances.

Significantassumptionsaboutthefutureandothersourcesofestimationuncertaintyattheendofthereportingperiod, thatcouldresult inamaterialadjustmenttothecarryingamountsofassetsand liabilities in the event that actual resultsdiffer fromassumptionsmade, include,but arenotlimitedto,thefollowing:

i. Inputsusedinmeasuringshare‐basedcompensation;andii. Provisionforthedeferredincometaxexpenseandthecompositionofdeferredincometax

liabilities.

1.12.1MineralresourcesandthecarryingvalueoftheCompany’sinvestmentinthePebblePartnership

Mineral resources are estimated by professional geologists and engineers in accordance withrecognizedindustry,professionalandregulatorystandards.Theseestimatesrequireinputssuchasfuture metals prices, future operating costs, and various technical geological, engineering, andconstructionparameters. Changes in any of these inputs could cause a significant change in theresources estimates which in turn could have a material effect on the carrying value of theCompany’sinvestmentinthePebblePartnership.

1.12.2 Impairmentanalysisofassets

AttheendofeachreportingperiodthecarryingamountsoftheCompany’sassetsarereviewedtodeterminewhether there is any indication that thoseassetsare impaired. If any such indicationexists, the recoverable amount of the asset is estimated in order to determine the extent of theimpairment,ifany.Therecoverableamountisthehigheroffairvaluelesscoststosellandvalueinuse.Inassessingvalueinuse,theestimatedfuturecashflowsarediscountedtotheirpresentvalueusingapre‐taxdiscountratethatreflectscurrentmarketassessmentsofthetimevalueofmoney



Page 25

andtherisksspecifictotheasset.Iftherecoverableamountofanassetisestimatedtobelessthanitscarryingamount,thecarryingamountoftheassetisreducedtoitsrecoverableamountandtheimpairmentlossisrecognizedintheprofitorlossfortheperiod.Forthepurposesofimpairmenttesting, exploration and evaluation assets are allocated to cash‐generating units to which theexplorationactivityrelates. Foranassetthatdoesnotgeneratelargelyindependentcashinflows,therecoverableamountisdeterminedforthecashgeneratingunittowhichtheassetbelongs.

Recoverability of the carrying amount of the exploration and evaluation assets is dependent onsuccessfuldevelopmentandcommercialexploitation,oralternatively,saleoftherespectiveassets.

Changesinanyoftheassumptionsusedtodetermineimpairmenttestingcouldmateriallyaffecttheresultsoftheanalysis.

AtJune30,2012,theCompanyreviewedthecarryingvalueofitsassetsanddeterminedthattherewerenoindicatorsofimpairment.

1.12.3 Restoration,rehabilitation,andenvironmentalobligations

An obligation to incur restoration, rehabilitation and environmental costs arises whenenvironmental disturbance is caused by the exploration or development of a mineral propertyinterest. Such costs arising from thedecommissioningofplant andother sitepreparationwork,discountedtotheirnetpresentvalue,areprovidedforandcapitalizedatthestartofeachprojecttothecarryingamountoftheasset,alongwithacorrespondingliabilityassoonastheobligationtoincur such costs arises. The timing of the actual rehabilitation expenditure is dependent on anumber of factors such as the life and nature of the asset, the operating license conditions, andwhenapplicabletheenvironmentinwhichthemineoperates.

Discountratesusingpre‐taxratesthatreflectthetimevalueofmoneyareusedtocalculatethenetpresentvalue. Thesecostsarechargedagainstprofitorlossovertheeconomiclifeoftherelatedasset, through amortizationusing either the unit‐of‐production or the straight linemethod. Thecorrespondingliabilityisprogressivelyincreasedastheeffectofdiscountingunwindscreatinganexpenserecognizedinprofitorloss.

Decommissioning costs are also adjusted for changes in estimates. Those adjustments areaccountedforasachangeinthecorrespondingcapitalizedcost,exceptwhereareductionincostsisgreater than theunamortized capitalized cost of the related assets, inwhich case the capitalizedcostisreducedtonilandtheremainingadjustmentisrecognizedinprofitorloss.

TheoperationsoftheCompanymayinthefuturebeaffectedfromtimetotimeinvaryingdegreebychangesinenvironmentalregulationsorchangesinestimatesusedindeterminingrestorationandrehabilitationobligations.BoththelikelihoodofnewregulationsordegreeofchangesinestimatesandtheiroveralleffectupontheCompanyarenotpredictable.

At June30,2012, the Company has no material restoration, rehabilitation and environmentalobligationsasthedisturbancetodateisminimal.



Page 26

1.12.4 Share‐basedcompensationexpense

Fromtimetotime,theCompanythroughitsBoardofDirectors,grantssharepurchaseoptionstodirectors, employees and serviceproviders. TheCompanyuses theBlack‐Scholes optionpricingmodeltoestimatethefairvaluefortheseoptions.Thismodel,andothermodelswhichareusedtofairvalueoptions,requireinputssuchasexpectedvolatility,expectedlifetoexercise,andinterestrates. Changes in any of these inputs could cause a significant change in the share‐basedcompensationexpensechargedinaperiod.

TheGroupgranted2.2millionsharepurchaseoptionsinthethreemonthsendedJune30,2012.Intheprioryear,theGrouphadgranted2.2millionsharepurchaseoptionsinthethreemonthsendedMarch31,2011.Theweightedaveragefairvalueofsharepurchaseoptionsgrantedwas$0.87peroption(2011‐$6.57peroption). OptionswerepricedbasedontheBlack‐Scholesoptionpricingmodelusing the followingweightedaverageassumptionsand inputs toestimate the fairvalueofsharepurchaseoptionsgranted:

Threemonthsended Threemonthsended June30,2012 March31,2011Risk‐freeinterestrate 1.11% 2.29%Expectedlife 3.43years 4.15 yearsExpectedvolatility 60% 64%Grantdateshareprice $2.38 $13.78Expecteddividendyield Nil Nil

1.12.5 IncomeTaxes

The Company uses the asset and liability method of accounting for income taxes. Under thismethod,deferredincometaxassetsandliabilitiesarecomputedbasedondifferencesbetweenthecarrying amounts of assets and liabilities on the statements of financial position and theircorresponding tax values, generally using the substantively enacted or enacted income tax ratesexpectedtoapplytotaxableincomeintheyearsinwhichthosetemporarydifferencesareexpectedtoberecoveredorsettled.Deferredincometaxassetsalsoresultfromunusedlosscarryforwards,resource‐relatedpoolsandotherdeductions.Adeferredtaxassetisonlyrecognizedtotheextentthat it is probable that future taxable profits will be available against which the asset can beutilized.

A deferred tax liability would arise on the carrying value of the investment in the PebblePartnership as a result of historical transactions. The Company recognizes net deferred taxliabilitiesasitbelievesitdoesnotcontrolthetimingofthereversalofthesetemporarydifferenceseventhoughmanagementhasmadethejudgmentthatthereversalisnotexpectedtooccurintheforeseeablefuture.



Page 27

1.13 ChangesinAccountingPoliciesincludingInitialAdoption

AccountingStandards,InterpretationsandAmendmentstoExistingStandards

Effective January 1, 2012, the Group adopted amendments to IFRS7, Financial Instruments:Disclosures thatwere issuedby the IASB. Theapplicationof theseamendmentshasnothadanymaterial impact on current and prior year disclosures but may affect disclosures for futuretransactionsorarrangements.

Accountingstandards,amendmentsandrevisedstandardsnotyeteffective

1) EffectiveforannualperiodsbeginningonorafterJuly1,2012

AmendmentstoIAS1,PresentationofFinancialStatements

2) EffectiveforannualperiodsbeginningonorafterJanuary1,2013

NewstandardIFRS10,ConsolidatedFinancialStatements NewstandardIFRS11,JointArrangements NewstandardIFRS12,DisclosureofInterestsinOtherEntities NewstandardIFRS13,FairValueMeasurement ReissuedIAS27,SeparateFinancialStatements ReissuedIAS28,InvestmentsinAssociatesandJointVentures

TheCompanyhasnotearlyadoptedtheseneworrevisedstandardsandiscurrentlyassessingtheimpactthatthesestandardswillhaveontheconsolidatedfinancialstatements.

New interpretation IFRIC20,StrippingCosts in theProductionPhaseofaSurfaceMine.ThisinterpretationandtherequirementsforaccountingforstrippingcostswillonlybeapplicabletotheGrouponceitisintheproductionphase.

3) EffectiveforannualperiodsbeginningonorafterJanuary1,2015

New standard IFRS 9, Financial Instruments, Classification and Measurement. TheCompany anticipates that the adoption of this standard will have no material impactexceptforadditionaldisclosures.

1.14 FinancialInstrumentsandOtherInstruments

TheloanreceivablebytheCompanyfromLibertyStarhasanequityconversionoption.Thisequityconversionfeaturehasbeendeterminedtobeanembeddedderivativewhichrequiresseparationfromtheloanreceivable.Forembeddedderivativesidentifiedforseparation,thefairvalueofthederivativemustbecalculatedasoftheinceptiondateandateachreportingdatesubsequenttotheinceptiondate.TheCompanyhasdeterminedthatthefairvalueoftheequityconversionoptionatthe date of inception and at June30,2012, is of nominal value as no definitive earn‐in and jointventureagreementhasbeenenteredintoandtheMinimumExpenditurehasnotbeenincurredbytheCompanyinrespecttotheJVAgreementclaims.

1.14.1 Non‐derivativefinancialassets:

TheCompanyhasthefollowingnon‐derivativefinancialassets:available‐for‐salefinancialassetsandloansandreceivables.



Page 28

Available‐for‐sale("AFS")financialassets

The Company has marketable securities which are classified as AFS financial assets and aremeasured at fair value with changes therein, other than impairment losses recognized in othercomprehensiveincomeorloss.Atthereportingdatethesesecuritieshadanominalvalue.

Loansandreceivables

Loansandreceivablesarefinancialassetswithfixedordeterminablepaymentsthatarenotquotedinanactivemarket.Suchassetsareinitiallyrecognizedatfairvalueplusanydirectlyattributabletransaction costs. Subsequent to initial recognition loans and receivables are measured atamortizedcostusingtheeffectiveinterestmethod,lessanyimpairmentlosses.

LoansandreceivablescompriseamountsreceivableincludingtheLibertyStarloanreceivableandbalancesreceivablefromrelatedparties.

1.14.2 Non‐derivativefinancialliabilities:

The Company has the following non‐derivative financial liabilities: amounts payable and otherliabilities.

Such financial liabilities are recognized initially at fair value net of any directly attributabletransaction costs. Subsequent to initial recognition these financial liabilities are measured atamortizedcostusingtheeffectiveinterestmethod.

1.14.3 FinancialRiskManagement

TheCompanyisexposedinvaryingdegreestoavarietyoffinancialinstrumentrelatedrisks.TheBoardapprovesandmonitorstheriskmanagementprocesses,inclusiveofdocumentedinvestmentpolicies, counterparty limits, andcontrollingandreporting structures. The typeof riskexposureandthewayinwhichsuchexposureismanagedisprovidedasfollows:

CreditRisk

Creditrisk is theriskofpotential losstotheCompanyifacounterpartytoa financial instrumentfailstomeet itscontractualobligations. TheCompany’screditriskisprimarilyattributableto itsliquid financial assets, including cash and cash equivalents, amounts receivable including theCompany’s loanreceivable fromLibertyStarandbalancesreceivable fromrelatedparties. Therehas been no change in the Company’s objectives and policies for managing this risk except forchanges in the carrying amounts of financial assets exposed to credit risk, and there was nosignificant change to the Company’s exposure to credit risk during the six months endedJune30,2012.Managementhasconcludedthatthereisnoobjectiveevidenceofimpairmenttoitsamounts receivable at June30,2012 which included assessing the recoverability of the loanreceivablefromLibertyStar.

TheCompany’s loanreceivable fromLibertyStar issecuredbyotherclaimsandassetsownedbyLibertyStarinAlaska,USA.



Page 29

LiquidityRisk

Liquidityrisk is therisk that theCompanywillnotbeable tomeet its financialobligationswhentheybecomedue.TherehasbeennochangeintheCompany’sobjectivesandpoliciesformanagingthisrisk.TheCompany’sliquiditypositionhasbeendiscussedinSection1.6Liquidity.

ForeignExchangeRisk

The Group is exposed to foreign exchange risk in respect to its loan receivable which isdenominated inUSdollars. Alsocertainof theCompany’scorporateexpensesare incurred inUSdollars. Asaconsequence,theCompany’soperationsaresubjecttocurrencytransactionriskandcurrencytranslationrisk.TheoperatingresultsandfinancialpositionoftheCompanyarereportedinCanadiandollarsintheCompany’sconsolidatedfinancialstatements. ThefluctuationoftheUSdollarinrelationtotheCanadiandollarwillconsequentlyhaveanimpactuponthelossesincurredby the Company and may also affect the value of the Company’s assets and the amount ofshareholders’ equity. The Company has not entered into any agreements or purchased anyinstrumentstohedgepossiblecurrencyrisksatthistime.

TherehasbeennochangeintheCompany’sobjectivesandpoliciesformanagingthisrisk,exceptfor thechanges in thecarryingamountsof financialassetsexposed to foreignexchangerisk,andtherewasnosignificantchangetotheCompany’sexposuretoforeignexchangeriskduringthesixmonthsendedJune30,2012.

Interestraterisk

The Company is subject to interest rate risk with respect to its investments in cash and cashequivalents.TherehasbeennochangeintheCompany’sobjectivesandpoliciesformanagingthisriskandnosignificantchangetotheCompany’sexposuretointerestrateriskduringthesixmonthsendedJune30,2012.

Commoditypricerisk

WhilethevalueoftheCompany’scoremineralresourceproperty,heldthroughits50%interestinthePebblePartnership,isrelatedtothepriceofgold,copperandmolybdenumandtheoutlookfortheseminerals,theCompanycurrentlydoesnothaveanyoperatingminesandhencedoesnothaveanyhedgingorothercommoditybasedrisksinrespectofitsoperationalactivities.

Gold, copper, and molybdenum prices have fluctuated widely historically and are affected bynumerous factors outside of the Company's control, including, but not limited to, industrial andretail demand, central bank lending, forward sales by producers and speculators, levels ofworldwideproduction,short‐termchanges insupplyanddemandbecauseofspeculativehedgingactivities,andcertainotherfactorsrelatedspecificallytogold.

CapitalManagement

TheCompany'spolicyis tomaintainastrongcapitalbasesoastomaintaininvestorandcreditorconfidence and to sustain future development of the business. The capital structure of theCompanyconsistsofequity,comprisingsharecapital,netofaccumulateddeficit.



Page 30

TherewerenochangesintheCompany'sapproachtocapitalmanagementduringtheperiod.TheCompanyisnotsubjecttoanyexternallyimposedcapitalrequirements.

1.15 OtherMD&ARequirements

Additional information relating to the Company, including the Company's Annual InformationForm,isavailableundertheCompany’sprofileonSEDARatwww.sedar.com.

1.15.1DisclosureofOutstandingShareData

ThecapitalstructureoftheCompanyisshowninthefollowingtable:

CommonsharesissuedandoutstandingAsofAugust7,2012 94,995,764AsofJune30,2012 94,995,764

Shareoptions–asofAugust7,2012 7,661,230(Weightedaverageexercisepriceper share:$7.00)

1.15.2DisclosureControlsandProcedures

TheCompanyhasdisclosurecontrolsandproceduresinplacetoprovidereasonableassurancethatanyinformationrequiredtobedisclosedbytheCompanyundersecuritieslegislationisrecorded,processed, summarized and reported within the applicable time periods and that requiredinformationisgatheredandcommunicatedtotheCompany'smanagementsothatdecisionscanbemadeabouttimelydisclosureofthatinformation.

1.15.3Management’sReportonInternalControloverFinancialReporting

TheCompany'smanagement,includingtheChiefExecutiveOfficer("CEO")andtheChiefFinancialOfficer ("CFO"), is responsible for establishing and maintaining adequate internal control overfinancialreporting. Internalcontroloverfinancialreporting("ICFR")isaprocessdesignedby,orunder the supervision of, the Company's principal executive and principal financial officers andeffected by the Company's Board of Directors, management and other personnel, to providereasonable assurance regarding the reliability of financial reporting and the preparation ofconsolidatedfinancialstatements forexternalpurposes inaccordancewithIFRS. TheCompany'sICFRincludesthosepoliciesandproceduresthat:

pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsoftheCompany;

provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with IFRS, and that receipts andexpenditures of the Company are beingmade only in accordance with authorizations ofmanagementanddirectorsofthecompany;and

provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition,useordispositionoftheCompany'sassetsthatcouldhaveamaterialeffectontheconsolidatedfinancialstatements.



Page 31

1.15.4ChangesinInternalControloverFinancialReporting

Therehasbeennochange in thedesignof theCompany’s ICFRthathasmateriallyaffected,or isreasonablylikelytomateriallyaffect,theCompany’sICFRduringtheperiodcoveredbythisMD&A.

1.15.5LimitationsofControlsandProcedures

The Company’s management, including its CEO and CFO, believe that any system of disclosurecontrols and procedures or ICFR, nomatter howwell conceived and operated, can provide onlyreasonable,notabsolute,assurancethattheobjectivesofthecontrolsystemaremet.Furthermore,the design of a control systemmust reflect the fact that there are resource constraints and thebenefitsofcontrolsmustbeconsideredrelativetotheircosts.Becauseoftheinherentlimitationsinallcontrolsystems,theycannotprovideabsoluteassurancethatallcontrolissuesandinstancesoffraud,ifany,withintheCompanyhavebeenpreventedordetected. Theseinherentlimitationsinclude the realities that judgments in decision‐making can be faulty and breakdowns can occurbecauseofsimpleerrorormistake. Additionally,controlscanbecircumventedbythe individualactsofsomepersons,bycollusionoftwoormorepeople,orbyunauthorizedoverrideofcontrols.The design of any system of controls is also based in part upon certain assumptions about thelikelihoodoffutureevents,andtherecanbenoassurancethatanydesignwillsucceedinachievingits stated goals under all potential future conditions. Accordingly, because of the inherentlimitations inacosteffectivecontrolsystem,misstatementsdue toerroror fraudmayoccurandnotbedetected.

1.15.6RiskFactors

Thefollowingaretheprincipalriskfactorsanduncertaintieswhich,inmanagement'sopinion,arelikelytomostdirectlyaffecttheultimatefeasibilityofthePebbleproject.

ThePebbleProject’smineralpropertyinterestsdonotcontainanyorereservesoranyknownbodyofeconomicmineralization

Although there are known bodies of mineralization on the Pebble Project, and the PebblePartnership has completed core drilling programs within, and adjacent to, the deposits todeterminemeasured and indicated resources, there are currently no known reserves or body ofcommerciallyviableoreandthePebbleProjectmustbeconsideredanexplorationprospectonly.ExtensiveadditionalworkisrequiredbeforetheCompanyorthePebblePartnershipcanascertainifanymineralizationmaybeeconomicandhenceconstitute"ore".Engineering,socioeconomicandenvironmentalstudiesareongoing. Exploration forminerals isaspeculativeventurenecessarilyinvolvingsubstantial risk. If theexpenditures theCompanyand/or thePebblePartnership incurandhaveincurredinthepastonthePebbleProjectdonotresultindiscoveryanddevelopmentofcommercialquantitiesofore,thevalueofexplorationandacquisitionexpendituresincurredwillbetotallylost.

Feasibilitywork todetermine theviabilityof thePebbleProjecthasnotbeencompletedandpermitshavenotbeenappliedfor

Final feasibilityworkhas not beendone to confirm thepit or undergroundminedesign,miningmethods,andprocessingmethods.Finalfeasibilitycoulddeterminethatthecurrentlyassumedpitor otherminedesign,miningmethods, andprocessingmethods are incorrect. Construction andoperation of the mine and processing facilities depends on securing environmental and other



Page 32

permitsona timelybasis. Nopermitshavebeenapplied forand therecanbenoassurance thatrequiredpermitscanbe securedorsecuredona timelybasis. Costestimatesusedarebasedoncostsatprojectsbelievedtobecomparable,andnotbasedonfirmpricequotes. Costs, includingdesign, procurement, construction, and on‐going operating costs and metal recoveries could bemateriallydifferentfromthosecurrentlyassumed.Therecanbenoassurancethatminingcanbeconducted at assumed rates and grades. Theproject requires thedevelopmentof port facilities,roadsandelectricalgeneratingandtransmissionfacilities.AlthoughtheCompanybelievesthattheState of Alaska favours the development of these facilities, there can be no assurance that theseinfrastructurefacilitiescanbedevelopedonatimelyandcost‐effectivebasis.Energyrisksincludethepotentialforsignificantincreasesinthecostoffuelandelectricity.

VolatilityinMetalPrices

The project has been evaluated using projected long‐term price levels for copper, gold andmolybdenum.Pricesforthesecommoditiesarehistoricallyvolatile,andneithertheCompanynorthePebblePartnershiphascontrolofor influenceonthoseprices,allofwhicharedeterminedininternationalmarkets. The levelof interest rates, the rateof inflation, theworld suppliesof anddemands for copper, gold and molybdenum and the stability of exchange rates can all causefluctuations in these prices. Such external economic factors are influenced by changes ininternationalinvestmentpatternsandmonetarysystemsandpoliticaldevelopments.Therecanbenoassurancethatthepricesofthesecommoditieswillcontinueatcurrentlevelsorthattheywillnotdeclinebelowtheprojectedprices.Thepricesofcopper,goldandmolybdenumhavefluctuatedinrecentyearsandtheyhaveshownanupwardtrendoflate,futuresignificantpricedeclinescouldcause unfavorable changes in the economics of the project and may result in investors beingunwillingtofinancemineralprojects,withtheresultthattheCompanymaynotbeabletoobtainsufficientfinancingtofunditsexplorationand,ifwarranted,developmentactivities.

Compliancewithenvironmentalrequirementswillcommand largeresourcesandchanges tothese requirements could significantly increase the costsdeveloping thePebbleProjectandcoulddelaytheseactivities.

ThePebblePartnershipandtheCompanymustcomplywithstringentenvironmentallegislationincarryingoutworkonthePebbleProject.Environmentallegislationisevolvinginamannerthatwillrequirestricterstandardsandenforcement,increasedfinesandpenaltiesfornon‐compliance,morestringent environmental assessments of proposed projects and a heightened degree ofresponsibilityforcompaniesandtheirofficers,directorsandemployees.ChangesinenvironmentallegislationcouldincreasethecosttothePebblePartnershipofcarryingoutitsexplorationand, ifwarranted, development of the Pebble Project. Further, compliance with new or additionalenvironmental legislationmayresult indelays to theexplorationand, ifwarranted,developmentactivities.

Changesingovernmentregulationsandthepresenceofunknownenvironmentalhazardsmayresultinsignificantunanticipatedcomplianceandreclamationcosts

Governmentregulationsrelatingtomineralrightstenure,permissiontodisturbareasandtherighttooperatecanadverselyaffect theCompany. NorthernDynastyandthePebblePartnershipmaynot be able to obtain all necessary licenses and permits that may be required to carry outexploration at their project. Obtaining the necessary governmental permits is a complex, time‐consumingandcostlyprocess.Thedurationandsuccessofeffortstoobtainpermitsarecontingentupon many variables not within the Company’s or the Pebble Partnership’s control. Obtainingenvironmentalpermitsmayincreasecostsandcausedelaysdependingonthenatureoftheactivity



Page 33

tobepermittedandtheinterpretationofapplicablerequirementsimplementedbythepermittingauthority.Therecanbenoassurancethatallnecessaryapprovalsandpermitswillbeobtainedand,ifobtained,thatthecostsinvolvedwillnotexceedthosethatwepreviouslyestimated.ItispossiblethatthecostsanddelaysassociatedwiththecompliancewithsuchstandardsandregulationscouldbecomesuchthatwewouldnotproceedwiththedevelopmentofthePebbleProjectoroperation.

SeediscussiononEPAunder1.2.1.4LegalMatters.

GeneralMiningRisks

Miningisaninherentlyriskybusinesswithlargecapitalexpendituresandcyclicalmetalsmarkets.AlthoughtheCompanyandthePebblePartnershipmaintainhighenvironmentalstandardsfortheirproject,likemostmajorminingprojects,therearealmostalwayspublicconcernsaboutnewminingprojects.TheopponentsofthePebbleProjectarewellorganizedandaretryingtobringpublicandpoliticalpressureagainst thePebbleProject. If successful, theopponentscoulddelayorpreventthe commercialization of the Pebble Project even if it is found to be economically viable andtechnicallyandlegallypermittable.

TheCompanyandPebblePartnershipalsocompetewithmanycompaniespossessing fargreaterfinancialresourcesandtechnicalfacilitiesfortheacquisitionofmineralconcessions,claims,leasesandothermineralinterests,aswellasfortherecruitmentandretentionofqualifiedemployees.

The Pebble Project will require major financing, probably a combination of debt and equityfinancing. There can be no assurance that debt and/or equity financing will be available onacceptableterms.Asignificantincreaseincostsofcapitalcouldmateriallyandadverselyaffectthevalueandfeasibilityofconstructingtheproject.

Documents

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS€¦ · The Company’s corporate office is located at 1040 West Georgia Street, 15th floor, Vancouver, British Columbia. The condensed