-------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 6-K REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934 As at AUGUST 16, 2011 Commission File Number: 001-32210 NORTHERN DYNASTY MINERALS LTD. (Translation of registrant's name into English) 15th Floor - 1040 W. Georgia St. Vancouver, British Columbia Canada V6E 4H1 (Address of principal executive offices) Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. [ ] Form 20-F [ x ] Form 40-F Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ] Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ] Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes [ ] No [ x ] If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- _________ -------------------------------------------------------------------------------- SUBMITTED HEREWITH Exhibits 99.1 Condensed Consolidated Interim Statements for the Period Ended June 30, 2011 99.2 Management’s Discussion and Analysis for the Period Ended June 30, 2011 99.3 Form 52-109F2 Certification of Interim Filings - Full Certificate - CEO 99.4 Form 52-109F2 Certification of Interim Filings - Full Certificate - CFO -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Northern Dynasty Minerals Ltd. (Registrant) Date: August 16, 2011 By: /s/ Marchand Snyman -------------------------------------------------------------------------------- Marchand Snyman Title: Director, Chief Financial Officer -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2011 (Expressed in thousands of Canadian Dollars) (Unaudited) -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Condensed Consolidated Interim Statements of Financial Position (Unaudited - Expressed in thousands of Canadian Dollars) As at June 30 December 31 Notes 2011 2010 ASSETS Non-current assets Investment in the Pebble Limited Partnership 3 $ 96,301 $ 99,306 Mineral property interest 4 1,055 1,055 97,356 100,361 Current assets Balances receivable from a related party 8 – 75 Amounts receivable and other assets 5 3,385 3,408 Marketable securities 1 1 Cash and cash equivalents 6 41,539 40,402 44,925 43,886 Total Assets $ 142,281 $ 144,247 EQUITY Share capital 7 $ 388,273 $ 380,570 Reserves 38,859 35,114 Deficit (288,566 ) (275,624 ) 138,566 140,060 LIABILITIES Non-current liabilities Deferred income taxes 3,523 3,633 3,523 3,633 Current liabilities Balances payable to a related party 8 110 102 Amounts payable and other liabilities 9 82 452 192 554 Total Liabilities 3,715 4,187 Total Equity and Liabilities $ 142,281 $ 144,247 The accompanying notes are an integral part of these condensed consolidated interim financial statements. These condensed consolidated interim financial statements are authorized for issue by the Board of Directors on August 12, 2011. They are signed on the Company's behalf by: /s/ Ronald W. Thiessen /s/ Robert A. Dickinson Ronald W. Thiessen Robert A. Dickinson Director Director Page 2 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Condensed Consolidated Interim Statements of Comprehensive Loss (Unaudited - Expressed in thousands of Canadian Dollars, except for share information) Three months ended June 30 Six months ended June 30 Notes 2011 2010 2011 2010 Expenses Conference and travel $ 25 $ 55 $ 128 $ 183 Donations 7(a) 866 – 866 3 Exploration 141 150 457 297 Foreign exchange loss (gain) 17 (105 ) 96 (84 ) Insurance 68 62 135 126 Legal, accounting and audit 41 36 94 66 Office costs 308 226 505 333 Salaries 676 747 1,298 1,172 Shareholder communication 97 158 273 256 Share-based compensation 7(b) 2,782 4,340 9,283 5,242 Trust and filing 48 42 229 207 Loss from operating activities 5,069 5,711 13,364 7,801 Interest income (225 ) (90 ) (422 ) (171 ) Loss before tax 4,844 5,621 12,942 7,630 Income tax expense (recovery) – 3 – (32 ) Loss for the period $ 4,844 $ 5,624 $ 12,942 $ 7,598 Other comprehensive loss (income) Unrealized loss on available-for-sale marketable securities – 1 – 1 Exchange difference arising on translation of investment in the Pebble Limited Partnership 3 509 (4,872 ) 3,005 (1,358 ) Deferred income tax on investment 7(c) (19 ) 176 (110 ) 49 Other comprehensive loss (income) $ 490 $ (4,695 ) $ 2,895 $ (1,308 ) Total comprehensive loss $ 5,334 $ 929 $ 15,837 $ 6,290 Basic and diluted loss per common share 11 $ 0.05 $ 0.06 $ 0.14 $ 0.08 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 3 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Condensed Consolidated Interim Statements of Cash Flows (Unaudited - Expressed in thousands of Canadian Dollars) Six months ended June 30 Note 2011 2010 Cash flows from operating activities Loss for the period $ (12,942 ) $ (7,598 ) Adjustments for: Donation of shares 866 – Foreign exchange loss 97 4 Income tax expense (recovery) – (32 ) Interest income (422 ) (171 ) Share-based compensation 9,283 5,242 (3,118 ) (2,555 ) Changes in non-cash working capital items Decrease in amounts receivable and other assets 70 62 Decrease (increase) in balances receivable from related parties 75 (4 ) Decrease in amounts payable and other liabilities (370 ) (92 ) Decrease in balances payable to related parties 8 74 (217 ) 40 Net cash used in operating activities (3,335 ) (2,515 ) Cash flows from investing activities Interest income 279 171 Loan advanced 4 – (3,194 ) Mineral property interest 4 – (1,055 ) Net cash from (used in) investing activities 279 (4,078 ) Cash flows from financing activities Common shares issued for cash, net of issue costs 7 4,194 3,283 Net cash from financing activities 4,194 3,283 Net increase (decrease) in cash and cash equivalents 1,138 (3,310 ) Effect of exchange rate fluctuations on cash held (1 ) (4 ) Cash and cash equivalents at beginning of the period 40,402 44,895 Cash and cash equivalents at end of the period $ 41,539 $ 41,581 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 4 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Condensed Consolidated Interim Statements of Changes in Equity (Unaudited - Expressed in thousands of Canadian Dollars, except for share information) Share capital Reserves Equity settled Foreign share-based currency Investment payments translation revaluation Number of shares Amount reserve reserve reserve Deficit Total Balance at January 1, 2010 93,173,976 $ 370,660 $ 31,176 $ 5,743 $ – $ (261,509 ) $ 146,070 Shares issued for cash on exercise of share purchase options 672,034 3,283 – – – – 3,283 Fair value of share options allocated to shares issued on exercise – 3,408 (3,408 ) – – – – Share-based compensation – – 5,242 – – – 5,242 Total comprehensive income (loss) for the period – – – 1,309 (1 ) (7,598 ) (6,290 ) Balance at June 30, 2010 93,846,010 $ 377,351 $ 33,010 $ 7,052 $ (1 ) $ (269,107 ) $ 148,305 Balance at January 1, 2011 94,177,066 $ 380,570 $ 34,799 $ 316 $ (1 ) $ (275,624 ) $ 140,060 Shares issued for cash on exercise of share purchase options 722,108 4,194 – – – – 4,194 Fair value of share options allocated to shares issued on exercise – 2,643 (2,643 ) – – – – Shares donated (note 7(a)) 75,000 866 – – – – 866 Share-based compensation – – 9,283 – – – 9,283 Total comprehensive loss for the period – – – (2,895 ) – (12,942 ) (15,837 ) Balance at June 30, 2011 94,974,174 $ 388,273 $ 41,439 $ (2,579 ) $ (1 ) $ (288,566 ) $ 138,566 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Page 5 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) 1. NATURE OF OPERATIONS AND CONTINUANCE OF OPERATIONS Northern Dynasty Minerals Ltd. (the "Company") is incorporated under the laws of the Province of British Columbia, Canada, and its principal business activity is the exploration of mineral properties. The Company’s corporate office is located at 1040 West Georgia Street, 15th Floor, Vancouver, British Columbia. The condensed consolidated interim financial statements ("Interim Financial Statements”) of the Company as at and for the period ended June 30, 2011, include financial information for the Company and its subsidiaries (note 10) (together referred to as the "Group" and individually as "Group entities") and the Group’s interest in jointly controlled entities. The Company is the ultimate parent. The Group owns a 50% share in the Pebble Limited Partnership (the "Pebble Partnership") (note 3). The Pebble Partnership owns the Pebble Copper-Gold-Molybdenum Project (the "Pebble Project"), the Group’s principal mineral property interest located in Alaska, United States of America ("USA" or "US"). The Group is in the process of exploring its principal mineral property interest and has not yet determined whether the Pebble Project contains mineral reserves that are economically recoverable. The Group’s continuing operations and the underlying value and recoverability of the amounts shown for the investment in the Pebble Partnership is entirely dependent upon the existence of economically recoverable mineral reserves; the ability of the Group to obtain financing of its share to complete the exploration and development of the Pebble Project; the Pebble Partnership obtaining the necessary permits to mine; and future profitable production or proceeds from the disposition of the investment in the Pebble Partnership. 2. SIGNIFICANT ACCOUNTING POLICIES (a) Statement of Compliance These Interim Financial Statements have been prepared in accordance with IAS 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB"). They do not include all of the information required for full annual financial statements, and should be read in conjunction with the Group’s consolidated financial statements as at and for the year ended December 31, 2010. Accordingly accounting policies applied are the same as those applied in the Group’s annual financial statements which are filed under the Company’s profile on SEDAR at www.sedar.com. (b) Segment Reporting The Group operates in a single reportable operating segment – the acquisition, exploration and development of mineral properties. The Group’s core mineral property interest, the Pebble Project, held through the 50% interest in the Pebble Partnership, is located in Alaska, USA. All other significant assets are held within Canada. (c) Significant Accounting Estimates and Judgments The preparation of these Interim Financial Statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates. These Interim Financial Statements include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout the Interim Financial Statements, and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and future periods if the revision affects both current and future periods. These estimates are based on historical experience, current and future economic conditions and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Page 6 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) Sources of estimation uncertainty Significant assumptions about the future and other sources of estimation uncertainty that management has made at the end of the reporting period, that could result in a material adjustment to the carrying amounts of assets and liabilities, in the event that actual results differ from assumptions made, relate to, but are not limited to, the following: i. the inputs used in measuring share-based compensation included in the loss for the period; and ii. the provision for the income tax expense included in the loss for the period and the composition of deferred income tax liabilities included in the condensed consolidated interim statements of financial position. Critical accounting judgments The following judgements have been made: i. the recoverability of amounts receivable which are included in the condensed consolidated interim statements of financial position; ii. the recoverability of the carrying value of the investment in the Pebble Partnership and mineral property interest included in the condensed consolidated interim statements of financial position; and iii. the determination of categories of financial assets and financial liabilities which has been identified as an accounting policy which involves assessments made by management. (d) Accounting Standards, Interpretations and Amendments to Existing Standards Effective January 1, 2011, the Group adopted new and revised International Financial Reporting Standards ("IFRS") that were issued by the IASB. The application of these new and revised IFRS has not had any material impact on the amounts reported for the current and prior periods but may affect the accounting for future transactions or arrangements. (i) Amendment to IAS 32, Financial Instruments: Presentation Rights, options or warrants to acquire a fixed number of the Group’s equity instruments for a fixed amount of any currency will be allowed to be classified as equity instruments so long as the Group offers the rights, options or warrants pro rata to all of the Group’s existing owners of the same class of the Group’s non-derivative equity instruments. Page 7 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) (ii) Amendments to IFRS 3, Business Combinations These address the following: Clarification that the contingent consideration arising in a business combination previously accounted for in accordance with IFRS 3 that is outstanding at the adoption date continues to be accounted for in accordance with IFRS 3. Limiting the accounting policy choice to measure non-controlling interests upon initial recognition at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets to instruments that give rise to a present ownership interest and that currently entitle the holder to a share of net assets in the event of liquidation. Expansion of the guidance with regards to the attribution of the market-based measure of an acquirer’s share-based payment awards issued in exchange for acquiree awards. (iii) Amendments to IAS 27, Consolidated and Separate Financial Statements Clarification that the amendments to IAS 21, The Effects of Changes in Foreign Exchange Rates, IAS 28, Investments in Associates, and IAS 31, Interests in Joint Ventures resulting from IAS 27 should be applied prospectively, except for amendments resulting from renumbering. (iv) Amendments to IFRS 7, Financial Instruments: Disclosures Amendment to disclosure requirements, specifically ensuring qualitative disclosures are made in close proximity to quantitative disclosures in order to better enable financial statement users to evaluate an entity’s exposure to risks arising from financial instruments. (v) Amendments to IAS 1, Presentation of Financial Statements Clarification that the breakdown of changes in equity resulting from transactions recognized in other comprehensive income is required to be presented in the statement of changes in equity or in the notes to the financial statements. (vi) Amendments to IAS 24, Related Party Disclosures Amendment of the definition for related parties. (vii) Amendments to IAS 34, Interim Financial Reporting Addition of further examples of events or transactions that require disclosure and removal of references to materiality when discussing other minimum disclosures. Page 8 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) Accounting standards issued but not yet effective (i) Effective for annual periods beginning on or after July 1, 2011 • Amendments to IFRS 7, Financial Instruments: Disclosures Increase in disclosure with regards to the transfer of financial assets, especially if there is a disproportionate amount of transfer transactions that take place around the end of a reporting period. (ii) Effective for annual periods beginning on or after July 1, 2012 • Amendments to IAS 1, Presentation of Financial Statements Requires an entity to group items presented in the Statement of Comprehensive Income on the basis of whether they may be reclassified to earnings subsequent to initial recognition. For those items presented before taxes, the amendments to IAS 1 also require that the taxes related to the two separate groups be presented separately. Earlier adoption is permitted. (iii) Effective for annual periods beginning on or after January 1, 2013 • New standard IFRS 10, Consolidated Financial Statements. Builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company and provides additional guidance where it is difficult to assess. IFRS 10 replaces the consolidation requirements in SIC-12, Consolidation-Special Purpose Entities, and IAS 27, Consolidated and Separate Financial Statements. Concurrently with the issuance of IFRS 10, IAS 27 and IAS 28, Investments in Associates were revised and reissued as IAS 27, Separate Financial Statements and IAS 28, Investments in Associates and Joint Ventures, to align with the new consolidation guidance. • New standard IFRS 11, Joint Arrangements Under IFRS 11, joint arrangements are classified as joint operations or joint ventures based on the rights and obligations of the parties to the joint arrangements rather than its legal form. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (“joint operators”) have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (“joint venturers”) have rights to the net assets of the arrangement. IFRS 11 requires that a joint operator recognize its portion of assets, liabilities, revenues and expenses of a joint arrangement, while a joint venturer recognizes its investment in a joint arrangement using the equity method. IFRS 11 supercedes IAS 31, Interests in Joint Ventures and SIC-13, Jointly Controlled Entities-Non-monetary Contributions by Venturers. The Group is currently evaluating the impact that IFRS 11 may have on its consolidated financial statements. Page 9 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) • New standard IFRS 12, Disclosure of Interests in Other Entities Provides the disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and consolidated structured entities. • New standard IFRS 13, Fair Value Measurement Defines fair value and sets out in a single IFRS a framework for measuring fair value and requires disclosures about fair value measurements. The standard does not determine when an asset, a liability or an entity’s own equity instrument is measured at fair value. Rather, the measurement and disclosure requirements of IFRS 13 apply when another IFRS requires or permits the item to be measured at fair value (with limited exceptions). The Group has not early adopted these new or revised standards and is currently assessing the impact that these standards will have on the Group’s consolidated financial statements. (iv) Effective for annual periods beginning on or after January 1, 2015 • New standard IFRS 9, Financial Instruments, Classification and Measurement The standard represent phase 1 of 3 phases to replace IAS 39, Financial Instruments: Recognition and Measurement, in its entirety. When completed, IFRS 9, Financial Instruments, will be the new standard for the financial reporting of financial instruments that is principles-based and less complex than IAS 39. Phase 1 was issued In November 2009 and amended in October 2010 and addressed the classification and measurement of financial assets and financial liabilities. This standard requires that all financial assets be classified as subsequently measured at amortized cost or at fair value based on the Group’s business model for managing financial assets and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified as subsequently measured at amortized cost except for financial liabilities classified as at fair value through profit or loss, financial guarantees and certain other exceptions. The Group anticipates that the adoption of this standard will have no material impact except for additional disclosures 3. INVESTMENT IN THE PEBBLE LIMITED PARTNERSHIP On July 26, 2007, the Group converted a wholly-owned general partnership, formed in 2006 to hold its Pebble Property interest, into a limited partnership, the Pebble Partnership, so that an indirect wholly-owned subsidiary of Anglo American plc ("Anglo American") could subscribe for 50% of the Pebble Partnership's equity effective July 31, 2007. Each of the Group and Anglo American has equal rights in the Pebble Partnership through wholly-owned affiliates. The purpose of the Pebble Partnership is to engineer, permit, construct and operate a modern, long-life mine at the Pebble Project. The Pebble Partnership's assets include the shares of two Alaskan subsidiaries which hold registered title to the claims. To maintain its 50% interest in the Pebble Partnership, Anglo American is required to make staged cash investments into the Pebble Partnership aggregating to US$1.5 billion. Anglo American’s staged investment requirements include an initial minimum expenditure of US$125 million (completed in 2008) towards a prefeasibility report. The prefeasibility report is to be approved by the Board of the general partner (Pebble Mines Corp.), and is to summarize all previous prefeasibility studies. The Board of the general partner is also to approve the alternatives for a final feasibility study. After receipt of the approved prefeasibility report, Anglo American is required, in order to retain its 50% interest in the Pebble Partnership, to commit to further expenditures which bring Anglo American’s total investment to at least US$450 million, which amount is to be expended in producing a final feasibility study and in related activities, including to obtain relevant permits contemplated for current and planned activities, the completion of which is expected to take the Pebble Partnership to a production decision. Upon an affirmative decision by the Pebble Partnership to develop a mine following approval of a positive feasibility study, Anglo American is required to commit to the remainder of the total investment of US$1.5 billion in order to retain its interest in the Pebble Partnership. Following completion of the US$1.5 billion expenditure, any further expenditure will be funded by Anglo American and the Group on a 50:50 basis. To June 30, 2011, Anglo American has funded US$346.8 million ($366.4 million). The Pebble Partnership agreement provides for equal project control rights for both partners with no operator’s fees payable to either party. Page 10 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) The Group has determined that its investment in the Pebble Partnership qualifies as an interest in a jointly controlled entity under IAS 31, Interests in Joint Ventures, and applies the equity method in accounting for this interest. The Group has not recognized any share of the losses in the Pebble Partnership since inception as the Group has no obligation in respect to these losses as the agreement with Anglo American states that the distribution of losses funded by Anglo American are allocated 100% to Anglo American until the total investment of US$1.5 billion is met. For the period ended June 30, 2011, the Pebble Partnership has incurred losses totaling $29,193 (2010 – $24,946). Cumulative losses since inception of the Pebble Partnership to June 30, 2011 total $362,049 (2010 – $288,999). The accounting policies of the Pebble Partnership are the same as those followed by the Group. The Group’s investment in the Pebble Partnership is carried in US dollars. Exchange differences arising from the translation of the Group’s investment in the Pebble Partnership are recognized directly in the foreign currency translation reserve through other comprehensive loss (income). Investment in the Pebble Partnership As at June 30 As at December 31 2011 2010 Carrying value at the beginning of the year $ 99,306 $ 104,937 Foreign currency translation (note 7(c)) (3,005 ) (5,631 ) Carrying value at the end of the period $ 96,301 $ 99,306 Summary financial information for the equity accounted investee, not adjusted for the 50% ownership held by the Group, is as follows: Assets and Liabilities As at June 30 As at December 31 2011 2010 Non-current assets $ 96,053 $ 99,451 Current assets 12,711 14,825 Total assets $ 108,764 $ 114,276 Current liabilities 5,574 5,011 Total liabilities $ 5,574 $ 5,011 Page 11 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) Losses For the six months ended June 30 2011 2010 Net loss for the period $ 29,193 $ 24,946 Net cumulative losses 362,049 288,999 The net loss and the cumulative losses of the Pebble Partnership have not been included in the Interim Financial Statements of the Group. 4. MINERAL PROPERTY INTEREST On June 29, 2010, the Group entered into a binding letter agreement with Liberty Star Uranium & Metals Corp. and its subsidiary, Big Chunk Corp. (together, "Liberty Star"), pursuant to which Liberty Star sold 60.7 square kilometers of mineral claims located to the west of the Pebble Project in consideration for a US$1 million (approximately $1.1 million) cash payment and a loan advance of US$3 million (approximately $3.1 million). The purchase of the claims and the loan advance are interdependent (note 5(a)). The Pebble Partnership had the right to acquire these claims but has declined to exercise that right. 5. AMOUNTS RECEIVABLE AND OTHER ASSETS As at June 30 As at December 31 2011 2010 Amounts receivable $ 146 $ 132 Loan receivable (a) 3,183 3,136 Other assets – prepayments 56 140 Total $ 3,385 $ 3,408 (a) Loan receivable The loan receivable from Liberty Star earns 10% interest per annum compounded monthly. To date $300 has been recognized in interest income and included in the loan receivable. Other significant terms of the loan receivable include: i. The loan is secured by assets and mining claims owned by Liberty Star in Alaska, USA, in which the Group can earn a 60% interest if it spends US$10 million in exploration and claim maintenance over 6 years, subject to the signing of a definitive earn-in and joint venture agreement ("JV Agreement"). No definitive JV Agreement has been entered into as of the date these Interim Financial Statements have been authorized for issue. ii. The loan is to be paid back to the Group upon 45 days notice after the earlier of: a. The completion of the earn-in expenditure; or b. The Group decides to voluntarily terminate the JV Agreement provided the Group has spent at least US$1 million in earn-in expenditures; or c. Liberty Star terminates the JV Agreement due to a superior 3rd party offer. iii. The Group may elect to deem the outstanding loan (including interest) as part of its earn-in requirements. The Group however, can only consider this once a definitive JV Agreement has been entered into. Page 12 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) iv. The loan is convertible until the loan is repaid or deemed repaid, into common shares of Liberty Star based on a 5 day volume weighted average share price less the maximum allowable discount applicable as if Liberty Star shares were listed on the TSX Venture Exchange, provided that the Group has spent a minimum US$1 million in earn-in expenditures. To June 30, 2011, the Group had not expended US$1 million in earn-in expenditures. v. In addition to the above, the Group can require repayment of the loan and repayment will be due within 45 days thereof, because no definitive JV Agreement was entered into by the Group and Liberty Star within 60 days from the date of advancement of the loan. vi. The loan may be pre-paid by Liberty Star without penalty at any time on 10 days’ prior notice, during which the Group’s conversion rights will be unaffected. 6. CASH AND CASH EQUIVALENTS As at June 30 As at December 31 2011 2010 Business and savings accounts $ 32,270 $ 31,207 Guaranteed Investment Certificates 9,269 9,195 Total $ 41,539 $ 40,402 7. CAPITAL AND RESERVES (a) Authorized Share Capital At June 30, 2011, the authorized share capital comprised an unlimited (2010 – unlimited) number of common shares. The common shares do not have a par value. All issued shares are fully paid. During the period, the Group donated 75,000 common shares from its treasury to the University of British Columbia to assist in financing the construction of a new earth science building. The Group recognized $866 as the cost of the donation of the shares along with the corresponding share capital value based on the quoted market value per common share on the date of issue. (b) Share Purchase Option Compensation Plan The Group has a share purchase option plan approved by the Group’s shareholders that allows the Board of Directors to grant share purchase options, subject to regulatory terms and approval, to its officers, directors, employees, and service providers. The share purchase option plan (the "2011 Rolling Option Plan") is based on the maximum number of eligible shares equalling a rolling percentage of 10% of the Group's outstanding common shares, calculated from time to time. Pursuant to the 2011 Rolling Option Plan, if outstanding share purchase options are exercised and the number of issued and outstanding common shares of the Group increases, then the share purchase options available to grant under the plan increase proportionately. The exercise price of each share purchase option is set by the Board of Directors at the time of grant but cannot be less than the market price, being the 5-day volume weighted average trading price calculated the day before the grant. Share purchase options can have a maximum term of ten years (although share purchase options have generally been granted with a term of up to five years) and typically terminate 90 days following the termination of the optionee’s employment or engagement, except in the case of retirement or death. The vesting period for share purchase options is at the discretion of the Board of Directors at the time the options are granted. Page 13 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) The continuity of share purchase options for the period ended June 30, 2011 was as follows: Exercise price Dec 31 Forfeited / Jun 30 Expiry date per share 2010 Granted Exercised cancelled 2011 April 14, 2011 $9.74 22,500 – (12,500 ) (10,000 ) – April 30, 2011 $7.25 180,000 – (180,000 ) – – October 27, 2011 $3.00 84,693 – (23,365 ) – 61,328 February 2, 2012 $5.00 365,668 – – – 365,668 February 4, 2012 $5.00 1,125,885 – (181,209 ) – 944,676 February 20, 2012 $10.95 150,000 – – – 150,000 March 26, 2012 $8.25 25,000 – – – 25,000 April 11, 2013 $9.74 75,000 – – – 75,000 May 27, 2013 $7.59 1,602,030 – (71,700 ) (33,000 ) 1,497,330 August 22, 2013 $5.35 40,000 – – – 40,000 October 27, 2013 $3.00 107,000 – (10,000 ) – 97,000 February 2, 2014 $5.00 1,993,000 – (170,000 ) – 1,823,000 February 4, 2014 $5.00 73,334 – (73,334 ) – – March 15, 2014 $15.44 – 932,400 – (6,000 ) 926,400 May 27, 2015 $7.59 951,000 – – – 951,000 March 15, 2016 $15.44 – 1,266,000 – – 1,266,000 6,795,110 2,198,400 (722,108 ) (49,000 ) 8,222,402 Weighted average exercise price per share $6.19 $15.44 $5.81 $8.99 $8.68 Weighted average contractual remaining life (years) 2.50 2.57 Weighted average share price per share on exercise $16.88 During the period ended June 30, 2011, the Group granted 2,198,400 share purchase options to purchase common shares at an exercise price of $15.44 per common share. Of the share purchase options granted, 132,000 were granted to non-employees; 15,000 to a consultant for the provision of investor relations advisory services; 90,000 to a former director for engineering consulting services; and 27,000 to a consultant for geological advisory services. The Group determined that given the nature of the services being provided and that continues to be provided; it could not determine the fair value of these services reliably. As a consequence, the Group estimated that the value of these services approximates the fair value of the share purchase options granted measured using the Black-Scholes option pricing model which at June 30, 2011 amounted to $439. The Group cancelled 39,000 share purchase options due to forfeitures as a result of terminations and resignations, with an average exercise price of $8.80 and with expiry dates of May 27, 2013 and March 15, 2014. The Group also cancelled 10,000 options with an exercise price of $9.74 and expiry date of April 14, 2011 which had expired unexercised. Page 14 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) The continuity of share purchase options for the period ended June 30, 2010 was as follows: Exercise price Dec 31 Forfeited / Jun 30 Expiry date per share 2009 Granted Exercised cancelled 2010 April 14, 2011 $ 9.74 27,500 – – – 27,500 April 30, 2011 $ 7.25 180,000 – – – 180,000 October 27, 2011 $ 3.00 134,908 – (15,662 ) (4,409 ) 114,837 February 2, 2012 $ 5.00 474,834 – (89,166 ) – 385,668 February 4, 2012 $ 5.00 1,737,202 – (372,540 ) (62,835 ) 1,301,827 February 20, 2012 $10.95 150,000 – – – 150,000 March 26, 2012 $ 8.25 25,000 – – – 25,000 April 11, 2013 $ 9.74 75,000 – – – 75,000 May 27, 2013 $ 7.59 – 1,702,000 – – 1,702,000 August 22, 2013 $ 5.35 40,000 – – – 40,000 October 27, 2013 $ 3.00 130,000 – (23,000 ) – 107,000 February 2, 2014 $ 5.00 2,018,000 – (25,000 ) – 1,993,000 February 4, 2014 $ 5.00 220,000 – (146,666 ) – 73,334 May 27, 2015 $ 7.59 – 951,000 – – 951,000 5,212,444 2,653,000 (672,034 ) (67,244 ) 7,126,166 Weighted average exercise price per share $ 5.26 $ 7.59 $ 4.88 $ 4.87 $ 6.17 Weighted average contractual remaining life (years) 2.99 2.95 Weighted average share price per share on exercise $ 9.47 During the period ended June 30, 2010, the group issued 2,653,000 share purchase options to purchase common shares at an exercise price of $7.59 per common share. The Group cancelled 67,244 share purchase options due to forfeitures as a result of terminations and resignations, with exercise prices of $3.00 and $5.00 and with expiry dates of October 27, 2011 and February 4, 2012. Page 15 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) The following share purchase options were exercisable at June 30, 2011: At June 30, 2011 Exercise price per Number of options Number of options Expiry date share outstanding exercisable October 27, 2011 $ 3.00 61,328 61,328 February 2, 2012 $ 5.00 365,668 365,668 February 4, 2012 $ 5.00 944,676 944,676 February 20, 2012 $ 10.95 150,000 150,000 March 26, 2012 $ 8.25 25,000 25,000 April 11, 2013 $ 9.74 75,000 75,000 May 27, 2013 $ 7.59 1,497,330 947,997 August 22, 2013 $ 5.35 40,000 40,000 October 27, 2013 $ 3.00 97,000 97,000 February 2, 2014 $ 5.00 1,823,000 1,823,000 March 15, 2014 $ 15.44 926,400 308,800 May 27, 2015 $ 7.59 951,000 634,000 March 15, 2016 $ 15.44 1,266,000 422,000 8,222,402 5,894,469 Weighted average exercise price per share $ 8.68 $ 7.16 The weighted average fair value of the share purchase options granted during the period was $6.57 (2010 – $3.87) . Options were priced based on the Black-Scholes option pricing model using the following weighted average assumptions to estimate the fair value of options granted: June 30 June 30 2011 2010 Risk-free interest rate 2.29% 2.36% Expected life 4.15 years 3.73 years Expected volatility 64% 65% Grant date share price $13.78 $7.81 Expected dividend yield Nil Nil Option pricing models require the input of highly subjective assumptions including the expected price volatility. The Group determines volatility using historical closing prices as a basis for expected volatility from three to five years subject to forfeiture rates as appropriate. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable measure of the fair value of the Group's share purchase options. Page 16 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) (c) Foreign Currency Translation Reserve Six months ended June 30 2011 2010 Balance at beginning of period $ 316 $ 5,743 Exchange (loss) gain on translation of investment in the Pebble Partnership (3,005 ) 1,358 Deferred income tax on investment 110 (49 ) Balance at the end of period $ (2,579 ) $ 7,052 The foreign currency translation reserve represents accumulated exchange differences arising on the translation of the investment in the Pebble Partnership which has a US dollar functional currency and the related tax effect that has been recognized in other comprehensive loss. 8. RELATED PARTY BALANCES AND TRANSACTIONS A number of key management personnel, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. The following entities transacted with the Group in the reporting period. The terms and conditions of the transactions with key management personnel and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-key management personnel related entities on an arm’s length basis. Transactions with Key Management Personnel The aggregate value of transactions with key management personnel being directors and senior management comprising the Senior Vice President ("VP"), Corporate Development; VP, Engineering and VP, Public Affairs were as follows: For the Three months ended June 30 For the Six months ended June 30 Compensation 2011 2010 2011 2010 Salaries $ 389 $ 179 $ 799 $ 358 Share-Based Compensation 1,437 1,711 4,876 2,092 Total $ 1,826 $ 1,890 $ 5,675 $ 2,450 Page 17 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) Transactions with other Related Parties The aggregate value of transactions and outstanding balances with related parties were as follows: Three months ended June 30 Six months ended June 30 Transactions 2011 2010 2011 2010 Services rendered to the Group: Hunter Dickinson Services Inc. (a) $ 832 $ 424 $ 1,702 $ 937 Total for services rendered $ 832 $ 424 $ 1,702 $ 937 Reimbursement of third party expenses incurred on behalf of the Group: Hunter Dickinson Services Inc. (a) $ 162 $ 352 $ 479 $ 529 Total reimbursed by the Group $ 162 $ 352 $ 479 $ 529 Reimbursement of third party expenses incurred by the Group Pebble Partnership (b) $ – $ (59 ) $ – $ (59 ) Total reimbursed (to) the Group $ – $ (59 ) $ – $ (59 ) As at June 30 As at December 31 Related party balances receivable 2011 2010 Pebble Partnership (b) $ – $ 75 Total $ – $ 75 As at June 30 As at December 31 Related party balances payable 2011 2010 Hunter Dickinson Services Inc. (a) $ 110 $ 102 (a) Hunter Dickinson Services Inc. ("HDSI") is a private company which provides geological, corporate development, administrative and management services to the Group and its subsidiaries at annually set rates pursuant to a management services agreement. Several directors and other key management personnel, who are close business associates are also key management personnel of the Group. HDSI also incurs third party costs on behalf of the Group which is reimbursed by the Group at cost. (b) The Group paid consultants fees on behalf of the Pebble Partnership which was reimbursed by the Pebble Partnership in the normal course of operations. Page 18 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) 9. AMOUNTS PAYABLE AND OTHER LIABILITIES As at June 30 As at December 31 Falling due within the year 2011 2010 Trade payables $ 82 $ 452 10. SUBSIDIARIES Proportion of Ownership Name of Subsidiary Place of Incorporation Interest Principal Activity 3537137 Canada Inc. British Columbia, Canada 100% Holding Group 0796412 BC Ltd. British Columbia, Canada 100% Not active Northern Dynasty Partnership1 Alaska, USA 100% Holding Group U5 Resources Inc.2 Nevada, USA 100% Holding Company 1. The Group’s affiliate which holds the Group’s 50% interest in the Pebble Partnership (note 3). 2. The Group’s subsidiary which holds the claims purchased from Liberty Star (note 4). 11. BASIC AND DILUTED LOSS PER SHARE The calculation of basic and diluted loss per share for the period ended June 30, 2011 was based on the following: Three months ended June 30 Six months ended June 30 2011 2010 2011 2010 Loss attributable to common shareholders $ 4,844 $ 5,624 $ 12,942 $ 7,598 Weighted average number of common shares outstanding 94,881,703 93,815,083 94,725,468 93,414,340 Diluted loss per share did not include the effect of 8,222,402 (2010 – 7,126,166) share purchase options as they are anti-dilutive. 12. FINANCIAL RISK MANAGEMENT The Group is exposed in varying degrees to a variety of financial instrument related risks. The Board approves and monitors the risk management processes, inclusive of documented investment policies, counterparty limits, and controlling and reporting structures. The type of risk exposure and the way in which such exposure is managed is provided as follows: Credit Risk Credit risk is the risk of potential loss to the Group if a counterparty to a financial instrument fails to meet its contractual obligations. The Group’s credit risk is primarily attributable to its liquid financial assets, including cash and cash equivalents, amounts receivable and balances receivable from related parties. The Group limits the exposure to credit risk by only investing its cash and cash equivalents with high-credit quality financial institutions in business and saving accounts, guaranteed investment certificates, and in government treasury bills which are available on demand by the Group for its programs. Page 19 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) The Group’s loan receivable from Liberty Star (note 5(a)) is secured by other claims and assets owned by Liberty Star in Alaska, USA. Management has assessed the recoverability of the loan as at the end of the reporting period and based on financial information available on Liberty Star, management has concluded that there is no objective evidence of impairment to the loan and considers the full amount to be recoverable. Liquidity Risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations when they become due. The Group ensures, as far as reasonably possible, it will have sufficient capital in order to meet short to medium term business requirements, after taking into account cash flows from operations and the Group’s holdings of cash and cash equivalents. The Group’s cash and cash equivalents are currently invested in business accounts and guaranteed investment certificates which are available on demand. Historically, the Group’s sole source of funding has been the issuance of equity securities for cash, primarily through private placements to sophisticated investors and institutions. Except for 2008, when the Group issued common shares pursuant to a private placement financing, the Group has in each past year issued common shares pursuant to the exercise of share purchase options. The Group's access to financing is always uncertain. There can be no assurance of continued access to significant equity funding. The funding of expenditures on the Pebble Project held through the Pebble Partnership is currently being provided by Anglo American. Excluding cash and cash equivalents in the Pebble Partnership, Northern Dynasty has approximately $42 million in cash and cash equivalents for its own operating requirements. With the Pebble Project’s 2011 funding being funded by Anglo American, and given the Group’s holdings of cash and cash equivalents, the Group believes it has sufficient resources to cover its short to medium term cash requirements. As discussed in Note 3, the Group is in a 50:50 limited partnership with Anglo American. Each of the Group and Anglo American effectively has equal rights in the Pebble Partnership through wholly-owned affiliates. To maintain its 50% interest in the Pebble Partnership, Anglo American is required to make staged cash investments into the Pebble Partnership aggregating to US$1.5 billion over a period of several years. Anglo American completed the initial US$125 million commitment to fund prefeasibility study expenditures in 2008, plus additional expenditures approved. If a prefeasibility study is completed and the decision is to proceed, in order to retain its 50% interest, Anglo American is required to commit to further expenditures which will bring its total investment to at least US$450 million, which amount is to be expended producing a final feasibility study and in related activities, the completion of which is expected to take the Pebble Partnership to a production decision. Upon an affirmative decision to develop a mine, Anglo American is required to commit to the remaining portion of the total investment of US$1.5 billion in order to retain its 50% interest in the Pebble Partnership. At June 30, 2011, the Group had working capital of approximately $44.7 million as compared to $43.3 million at December 31, 2010. The Group has no contractual obligations other than current trade and related party payables (notes 8 and 9). Foreign exchange risk Page 20 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) The Group is exposed to foreign exchange risk as some of its cash and cash equivalents are held in US dollars. Also certain of the Group’s corporate expenses are incurred in US dollars. As a consequence, the Group’s results from its operations are subject to currency transaction risk and currency translation risk. The operating results and financial position of the Group are reported in Canadian dollars in the Group’s Interim Financial Statements. The fluctuation of the US dollar in relation to the Canadian dollar will consequently have an impact upon the losses incurred by the Group and may also affect the value of the Group’s assets and the amount of shareholders’ equity. The Group has not entered into any agreements or purchased any instruments to hedge possible currency risks at this time. The exposure of the Group’s cash and cash equivalents, amounts receivable and amounts receivable from related parties to foreign exchange risk is as follows: Currency As at June 30, 2011 As at December 31, 2010 Foreign currency Amount in Foreign currency Amount in amount Canadian dollars amount Canadian dollars US dollars Amounts receivable $ 3,301 $ 3,183 $ 3,153 $ 3,136 Cash and cash equivalents 90 87 49 48 Total financial assets $ 3,391 $ 3,270 $ 3,202 $ 3,184 The exposure of the Group’s amounts payable and other liabilities and amounts due to related parties to foreign exchange risk is as follows: Currency As at June 30, 2011 As at December 31, 2010 Foreign currency Amount in Foreign currency Amount in amount Canadian dollars amount Canadian dollars US dollars Amounts payable and other liabilities $ 16 $ 16 $ 1 $ 1 Total financial liabilities $ 16 $ 16 $ 1 $ 1 Based on the above net exposures and assuming that all other variables remain constant, a 10% depreciation of the Canadian dollar against the US dollar would result in a decrease in the loss of approximately $325 in the period (2010 – $333). This sensitivity analysis includes only outstanding foreign currency denominated monetary items, and excludes the effect of any translation adjustments for the investment in the Pebble Partnership. Interest rate risk The Group is subject to interest rate risk with respect to its investments in cash and cash equivalents. The Group’s policy is to invest cash at fixed rates of interest and cash reserves are to be maintained in cash and cash equivalents in order to maintain liquidity, while achieving a satisfactory return for shareholders. Fluctuations in interest rates when the cash and cash equivalents mature impact interest income earned. Assuming that all other variables remain constant, a 100 basis points change representing a 1% increase or decrease in interest rates would have resulted in a decrease or increase in the loss as follows: Page 21 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) Three months ended June 30 Six months ended June 30 2011 2010 2011 2010 Decrease or increase in loss $ 104 $ 110 $ 203 $ 214 Commodity price risk While the value of the Group’s core mineral resource property, held through its 50% interest in the Pebble Partnership, is related to the price of gold, copper and molybdenum and the outlook for these minerals, the Group currently does not have any operating mines and hence does not have any hedging or other commodity based risks in respect of its operational activities. Gold, copper, and molybdenum prices have historically fluctuated widely and are affected by numerous factors outside of the Group's control, including, but not limited to, industrial and retail demand, central bank lending, forward sales by producers and speculators, levels of worldwide production, short-term changes in supply and demand because of speculative hedging activities, and certain other factors related specifically to gold. Capital Management The Group's policy is to maintain a strong capital base so as to maintain investor and creditor confidence and to sustain future development of the business. The capital structure of the Group consists of equity, comprising share capital, net of accumulated deficit. There were no changes in the Group's approach to capital management during the period. The Group is not subject to any externally imposed capital requirements. Fair value The fair value of the Group’s financial assets and liabilities approximates the carrying amount. Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the relative reliability of the inputs used to estimate the fair values. The three levels of the fair value hierarchy are: • Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities; • Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and • Level 3 – Inputs that are not based on observable market data. Financial assets at fair value as at June 30, 2011 Level 1 Level 2 Level 3 Total Available for sale financial assets Marketable securities $ 1 $ – $ – $ 1 Total financial assets at fair value $ 1 $ – $ – $ 1 Page 22 -------------------------------------------------------------------------------- Northern Dynasty Minerals Ltd. Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2011 and 2010 (Unaudited – Expressed in thousands of Canadian Dollars, unless otherwise stated) Financial assets at fair value as at December 31,2010 Level 1 Level 2 Level 3 Total Available for sale financial assets Marketable securities $ 1 $ – $ – $ 1 Total financial assets at fair value $ 1 $ – $ – $ 1 13. COMMITMENTS AND CONTINGENCIES Due to the nature of the Group’s operations, various legal and tax matters are outstanding from time to time. In the opinion of management, there are no matters that could have a material effect on the Group’s consolidated interim financial position or interim results of operations which require additional disclosure of in these Interim Financial Statements. Page 23 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 T A B L E O F C O N T E N T S 1.1 DATE 3 1.2 OVERVIEW 5 1.2.1 SUMMARY 5 1.2.1.1 PEBBLE PROJECT 5 1.2.1.2 LIMITED PARTNERSHIP ESTABLISHED TO ADVANCE THE PEBBLE PROJECT 8 1.2.1.3 TECHNICAL PROGRAMS 9 1.2.1.4 LEGAL MATTERS 11 1.2.2 OTHER PROPERTIES 12 1.2.2.1 SOUTH PEBBLE, SP AND KAK CLAIMS 13 1.2.2.2 BIG CHUNK NORTH AND SOUTH AND BONANZA HILLS CLAIMS 13 1.2.3 MARKET TRENDS 14 1.3 SELECTED ANNUAL INFORMATION 15 1.4 SUMMARY OF QUARTERLY RESULTS 16 1.5 RESULTS OF OPERATIONS 17 1.6 LIQUIDITY 20 1.7 CAPITAL RESOURCES 21 1.8 OFF-BALANCE SHEET ARRANGEMENTS 21 1.9 TRANSACTIONS WITH RELATED PARTIES 21 1.10 FOURTH QUARTER 21 1.11 PROPOSED TRANSACTIONS 22 1.12 CRITICAL ACCOUNTING ESTIMATES 22 1.13 CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION 24 1.14 FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS 27 1.15 OTHER MD&A REQUIREMENTS 30 1.15.1 DISCLOSURE OF OUTSTANDING SHARE DATA 31 1.15.2 INTERNAL CONTROLS OVER FINANCIAL REPORTING 31 1.15.3 DISCLOSURE CONTROLS AND PROCEDURES 31 1.15.4 RISK FACTORS 32 Page 2 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 1.1 Date This Management’s Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited condensed consolidated interim financial statements (“Interim Financial Statements”) for the three and six months ended June 30, 2011 and the audited consolidated financial statements of Northern Dynasty Minerals Ltd. ("Northern Dynasty" or the "Company") for the year ended December 31, 2010 as publicly filed under the Company’s profile on SEDAR at www.sedar.com. The Company reports in accordance with International Financial Reporting Standards ("IFRS") and the following disclosure, and associated Interim Financial Statements, are presented in accordance with IFRS. This MD&A is prepared as of August 12, 2011. All dollar figures stated herein are expressed in Canadian dollars, unless otherwise specified. This discussion includes certain statements that may be deemed "forward-looking statements". These forward- looking statements constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All information contained in this management discussion relating to the contents of the Preliminary Assessment, including but not limited to statements of the potential Pebble Copper-Gold-Molybdenum Project (the "Pebble Project") and information under the headings "Preliminary Assessment Key Findings,” “Production Profiles,” “Financial Valuation” and “Capital and Operating Costs” are "forward looking statements" within the definition of the United States Private Securities Litigation Reform Act of 1995. The information relating to the possible construction of a port, road, power generating facilities and power transmission facilities also constitutes such "forward looking statements." The Preliminary Assessment was prepared to broadly quantify the Pebble Project's capital and operating cost parameters and to provide guidance on the type and scale of future project engineering and development work that will be needed to ultimately define the project's likelihood of feasibility and optimal production rate. It was not prepared to be used as a valuation of the Pebble Project nor should it be considered to be a prefeasibility study. Although based on a comprehensive technical review of recent engineering and technical studies undertaken by the Pebble Limited Partnership (the "Pebble Partnership") and Northern Dynasty, the studies of capital and operating costs are incomplete and have not been optimized, so the ultimate costs may vary significantly from the amounts set out in the Preliminary Assessment. This could materially and adversely impact the projected economics of the Pebble Project. The Preliminary Assessment is based on Wardrop’s comprehensive review of recent engineering and technical studies undertaken principally by the Pebble Partnership and by Northern Dynasty. The economic assessments and other opinions expressed in the Preliminary Assessment are strictly those of Northern Dynasty and Wardrop, and do not reflect the views of any other stakeholder in the project. As such, any project which is ultimately put forward by the Pebble Partnership for permitting under the National Environmental Policy Act may differ from those mine models presented in the Preliminary Assessment. The Preliminary Assessment, in part, uses inferred mineral resources which are considered too speculative geologically to be categorized as mineral reserves and to have economic considerations applied to them. There can be no assurance that the operating and financial projections contained in the Preliminary Assessment will be realized. The following are the principal risk factors and uncertainties which, in management's opinion, are likely to most directly affect the conclusions of the Preliminary Assessment and the ultimate feasibility of the Pebble Project. A portion of the mineralized material at the Pebble Project is currently classified as an inferred resource and it is not a reserve. The mineralized material in the Preliminary Assessment is based on the measured, indicated and inferred resources estimated by Hunter Dickinson Services Inc. and audited by Wardrop, a Tetra Tech Company. Additional process tests and other engineering and geologic work will be required to determine if the mineralized material is an economically exploitable reserve. There can be no assurance that this mineralized material can become a reserve or the amount that may be converted to a reserve or the grade thereof. Final feasibility work has not been done to confirm the pit design, mining methods, and processing methods assumed in the Preliminary Assessment. Final feasibility could determine that the assumed pit design, mining methods, and processing methods are not correct. Construction and operation of the mine and processing facilities depends on securing environmental and other permits on a timely basis. No permits have been applied for and there can be no assurance that required permits can be secured or secured on a timely basis. Data is incomplete and cost estimates have been developed in part based on the expertise of the individuals participating in the preparation of the Preliminary Assessment and on costs at projects believed to be comparable, and not based on firm price quotes. Costs, including design, procurement, construction, and on-going operating costs and metal recoveries could be materially different from those contained in the Preliminary Assessment. There can be no assurance that mining can be conducted at the rates and grades assumed in the Preliminary Assessment. The project requires the development of port facilities, roads and electrical generating and transmission facilities. Although Northern Dynasty believes that the State of Alaska favours the development of these facilities, there can be no assurance that these infrastructure facilities can be developed on a timely and cost-effective basis. Energy risks include the potential for significant increases in the cost of fuel and electricity. Page 3 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 The Preliminary Assessment assumes specified, long-term prices levels for gold, copper, silver and molybdenum. Prices for these commodities are historically volatile, and Northern Dynasty has no control of or influence on those prices, all of which are determined in international markets. There can be no assurance that the prices of these commodities will continue at current levels or that they will not decline below the prices assumed in the Preliminary Assessment. Prices for gold, copper, silver, and molybdenum have been below the price ranges assumed in Preliminary Assessment during the past ten years, and for extended periods of time. The Pebble Project will require major financing, probably a combination of debt and equity financing. Interest rates are at historically low levels. There can be no assurance that debt and/or equity financing will be available on acceptable terms. A significant increase in costs of capital could materially and adversely affect the value and feasibility of constructing the project. Other general risks include those ordinary to very large construction projects including the general uncertainties inherent in engineering and construction cost, the need to comply with generally increasing environmental obligations, and accommodation of local and community concerns. The Company is also subject to the specific risks inherent in the mining business, as well as general economic and business conditions. For more information on the Company, Investors should review the Company’s annual Form 40-F filing with the United States Securities and Exchange Commission and its home jurisdiction filings that are available on SEDAR at www.sedar.com. The Company reviews its forward looking statements on an ongoing basis and updates this information when circumstances require it. Unless otherwise noted, Northern Dynasty is solely responsible for the content of the disclosure set out herein. Page 4 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 Cautionary Note to Investors Concerning Estimates of Measured and Indicated Resources The following section uses the terms "measured resources" and "indicated resources". The Company advises investors that although those terms are recognized and required by Canadian regulations, the U.S. Securities and Exchange Commission (the "SEC") does not recognize them. Investors are cautioned not to assume that all or any part of mineral deposits in these categories will ever be converted into reserves. Cautionary Note to Investors Concerning Estimates of Inferred Resources The following section uses the term "inferred resources". The Company advises investors that although this term is recognized and required by Canadian regulations, the SEC does not recognize it. "Inferred resources" have a great amount of uncertainty as to their existence, and as to their economic and legal feasibility. It cannot be assumed that all or any part of a mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of economic studies, except in rare cases. Investors are cautioned not to assume that all or any part of an inferred resource exists, or is economically or legally mineable. 1.2 Overview 1.2.1 Summary Northern Dynasty is a mineral exploration company which holds indirect interests in 650 square miles of mineral claims in southwest Alaska, USA. These claims are part of or in the vicinity of the Pebble Copper-Gold-Molybdenum Project (the "Pebble Project"). 1.2.1.1 Pebble Project The Pebble property ("Pebble") is located in southwest Alaska, 19 miles (30 kilometers) from the villages of Iliamna and Newhalen, and approximately 200 miles (320 kilometers) southwest of the city of Anchorage. Situated approximately 1,000 feet above sea-level and 65 miles from tidewater on Cook Inlet, the site conditions are favorable for successful mine site and infrastructure development. Mineralization was discovered in 1987, and by 1997 an initial mineral resource of copper, gold and molybdenum had been outlined in the Pebble deposit by a previous operator. Northern Dynasty acquired the right to earn an interest in Pebble in late 2001. Over the next 5½ years, the Company explored the Pebble deposit and surrounding property. This work led to the discovery of a substantial volume of higher grade mineralization to the east and an overall expansion of the deposit, as well as the discovery of another porphyry copper-gold-molybdenum deposit, a porphyry copper zone, a gold-copper skarn occurrence, and gold showings along the extensive northeast-trending mineralized system underlying the property. Comprehensive environmental, social and engineering studies began in 2004. In mid-2007, a wholly-owned affiliate of Northern Dynasty and a wholly-owned subsidiary of Anglo American plc, Anglo American US (Pebble) LLC ("Anglo American") established the Pebble Limited Partnership (the “Pebble Partnership”) to engineer, permit, construct and operate a modern, long-life mine at the Pebble Project. The 50/50 Pebble Partnership owns the Pebble Project, which consists of the Pebble Deposit and 350 square miles of associated resource lands, along with a stream of financing being provided by Anglo American for comprehensive exploration, engineering, environmental and socioeconomic programs and, if warranted, development of the Pebble Project. Work programs at Pebble since mid-2007 have been carried out by the Pebble Partnership. These programs include detailed engineering, environmental and socioeconomic studies toward the completion of a prefeasibility study for the Pebble Project which will enable the Pebble Partnership to engage stakeholders in the planning process and the prepare for permitting under the National Environmental Policy Act ("NEPA"). Page 5 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 Preliminary Assessment Northern Dynasty commissioned an independent Preliminary Assessment of the Pebble Project, the results of which were announced by the Company on February 23, 2011. The study, completed by Wardrop, a Tetra Tech Company ("Wardrop")1, was based on concept, prefeasibility and feasibility-level study programs undertaken by the Pebble Partnership and Northern Dynasty. The Preliminary Assessment updates and substantially revises project economic analysis last done by Northern Dynasty in 2004. The economic assessments and other opinions expressed in the Preliminary Assessment are strictly those of Northern Dynasty and Wardrop, and do not reflect the views of any other stakeholder in the project. The Pebble Partnership continues to separately undertake detailed engineering, environmental and socioeconomic studies toward the completion of a prefeasibility report for the Pebble Project, including ongoing programs to engage project stakeholders in the planning process. As such, any project which is ultimately put forward by the Pebble Partnership for permitting under NEPA and the Alaska State Large Mine Permitting Process may differ from those mine models presented in the Preliminary Assessment. The Preliminary Assessment describes and assigns potential economic value to three successive mine development cases comprising 25, 45 and 78 years of open pit mining and a nominal processing rate of 200,000 tons per day. Key results include: For the Pebble Project, the 45-year Reference Case yields a 14.2% pre-tax internal rate of return ("IRR"), a 6.2-year payback on initial capital investment of US$4.7 billion and a US$6.1 billion pre- tax net present value ("NPV") at a 7% discount rate and long-term metal prices defined in the Preliminary Assessment as $2.50 per pound of copper, $1,050 per ounce of gold, $13.50 per pound of molybdenum and $15.00 per ounce of silver. At current prevailing metal prices, defined in the Preliminary Assessment as $4.00 per pound of copper, $1,350 per ounce of gold, $15.00 per pound of molybdenum and $28.00 per ounce of silver, the 45-year Reference Case yields a 23.2% pre-tax IRR, a 3.2-year payback on initial capital investment2 and a US$15.7 billion pre-tax NPV at a 7% discount rate. ___________________________________________ 1 Qualified Persons for the February 2011 Preliminary Assessment Technical Report include Hassan Ghaffari, P.Eng, Robert Morrison, P.Geo, Andre de Ruijter, P.Eng, Tysen Hantelmann, P.Eng, Aleksandar Zivkovic, P.Eng, and Scott Cowie, MAusIMM; Doug Ramsey, P.R. Bio is author of sustainability section. All of these qualified persons are independent of Northern Dynasty. The Preliminary Assessment is based on mineral resources at February 2010 within a volume or shell defined by long-term metal price estimates of US$2.50/lb copper, US$900/oz gold and US$25/lb molybdenum. Mineral resources that are not mineral reserves do not have demonstrated economic viability. At a 0.30% copper equivalent (CuEQ) cut-off, these comprise: 5.94 billion tonnes of Measured and Indicated Mineral Resources grading 0.42% copper, 0.35 g/t gold and 250 ppm molybdenum (0.78% CuEQ), containing 55 billion pounds of copper, 67 million ounces of gold, and 3.3 billion pounds of molybdenum; and 4.84 billion tonnes of Inferred Mineral Resources grading 0.24% copper, 0.26 g/t gold and 215 ppm molybdenum (0.53% CuEQ), containing 25.6 billion pounds of copper, 40.4 million ounces of gold, and 2.3 billion pounds of molybdenum. Copper equivalent calculations used metal prices of US$1.85/lb for copper, US$902/oz for gold and US$12.50/lb for molybdenum, and metallurgical recoveries of 85% for copper, 69.6% for gold, and 77.8% for molybdenum in the Pebble West area and 89.3% for copper, 76.8% for gold, 83.7% for molybdenum in the Pebble East area. 2 Initial capital expenditures for all three development cases are estimated at $4.7 billion, excluding capital costs associated with outsourced power, road and port infrastructure. Page 6 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 For Northern Dynasty’s 50% share of the project, the 45-year Reference Case 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 initial capital investment and a US$3.6 billion pre-tax and US$2.4 billion post-tax NPV at a 7% discount rate and long-term metal prices. At current prevailing metal prices, the 45-year Reference Case yields a 30.2% pre-tax and 25.1% post-tax IRR, a 2.6-year pre-tax and 3.1-year post-tax payback on initial capital investment and a US$8.3 billion pre-tax and $5.6 billion post-tax NPV at a 7% discount rate for Northern Dynasty’s 50% interest. The 45-year Reference Case produces 31 billion ("B") lb copper, 30 million ("M") oz gold, 1.4 B lb molybdenum, 140 M oz silver, 1.2 M kg rhenium and 907,000 oz palladium while mining only 32% of the mineral resource. For the 45-year Reference Case, cash costs per payable lb of copper after by-product credits total minus US$0.11. Additional details on the Preliminary Assessment are described in Northern Dynasty’s 2010 Annual Information Form and the February 2011 Preliminary Assessment Technical Report, both of which are posted on the Company’s profile at www.sedar.com. The results of the Preliminary Assessment confirm that the Pebble Project has the potential to generate substantial annual revenues, with increasingly better returns over decades of production. Although projects of the scale of Pebble are commonly developed by consortiums of major mining and metal companies, it also has the potential to be a company maker. Ongoing Prefeasibility Study and Environmental and Socioeconomic Work The Pebble Partnership continues to advance engineering and project design initiatives for the Pebble Project. Public consultation forums in Alaska are planned to gain input from stakeholders prior to the completion of a Prefeasibility Study and the submission of permit applications. Permitting will be initiated when the Pebble Partnership submits its Project Description and Environmental Baseline Document, which are the foundation for an Environmental Impact Statement ("EIS"). Prepared by a third-party contractor under the direction of a lead federal agency, the EIS will determine whether sufficient evaluation of the project’s potential environmental/socioeconomic effects and development alternatives has been undertaken, and will provide the basis for federal, state and local government agencies to make individual permitting decisions. The Pebble Partnership has assembled an experienced engineering and permitting team for the Pebble Project, consisting of more than 20 senior engineers and technical specialists (many of whom are from the Anglo American group or Northern Dynasty), as well as engineering firms and specialized consultancies from around the world. The Pebble Partnership has budgeted US$91 million for a comprehensive work program in 2011 to advance the Prefeasibility Study for the Pebble Project, finalize the Environmental Baseline Document, continue its community engagement and workforce development programs and prepare for permitting under NEPA. It is expected that the Pebble Partnership will complete a Prefeasibility Study for the Pebble Project in 2012, prior to initiating permitting under NEPA. Corporate Northern Dynasty has cash and cash equivalents on hand of $41.5 million for its operating requirements. As the Pebble Project is being financed by Anglo American in 2011, management believes that the Company has sufficient capital resources to cover its short to medium term cash requirements. Page 7 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 1.2.1.2 Limited Partnership Established to Advance the Pebble Project On July 26, 2007, the Company converted a wholly-owned general partnership that held its Pebble property interests into a limited partnership, the Pebble Partnership. Anglo American subscribed for 50% of the Pebble Partnership's equity effective July 31, 2007. The Company (through a wholly-owned affiliate) and Anglo American effectively have equal rights in the Pebble Partnership. To maintain its 50% interest in the Pebble Partnership, Anglo American is required to commit staged cash investments into the Pebble Partnership aggregating to US$1.5 billion. Anglo American’s staged investment requirements include an initial minimum expenditure of US$125 million (completed in 2008) towards a prefeasibility report. The prefeasibility report is to be approved by the Board of the general partner (Pebble Mines Corp.), and is to summarize all previous prefeasibility studies. The Board of the general partner is also to approve the alternatives for a final Feasibility Study. After receipt of the approved prefeasibility report, Anglo American is required, in order to retain its 50% interest in the Pebble Partnership, to commit within 90 days to further expenditures which would bring its total investment to at least US$450 million, which amount is to be expended towards producing a final feasibility study and related activities, the completion of which is expected to take the Pebble Partnership to a production decision. Upon an affirmative decision by the Pebble Partnership to develop a mine following approval of a positive Feasibility Study, Anglo American is required to commit to the remaining portion of the total investment of US$1.5 billion in order to retain its interest in the Pebble Partnership. Following completion of the US$1.5 billion expenditure, any further expenditure will be funded by Anglo American and the Company (through its affiliate) on a 50:50 basis (subject to dilution for non-contribution). The Pebble Partnership agreement provides for equal project control rights with no operator’s fees payable to either party. The Company determined that its investment in the Pebble Partnership qualifies as an interest in a jointly controlled entity in accordance with IAS 31, Interests in Joint Ventures. The Company applies the equity method to account for its interest in the Pebble Partnership. Anglo American’s cash contribution since the formation of the Pebble Partnership on July 31, 2007 to June 30, 2011 amounts to $366.4 million (US$346.8 million). The corporate office of the Pebble Partnership is located in Anchorage, Alaska. The Alaska-based operations are guided by the Board of the general partner with equal representation from Anglo American and Northern Dynasty. Page 8 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 1.2.1.3 Technical Programs Exploration and Drilling Site work in 2011 will be focused on drilling for engineering studies, and support for environmental field work. The drilling programs are designed to collect information around planned infrastructure, to continue geotechnical studies and metallurgical testwork, and to further test groundwater conditions and overburden characteristics in the pit area. Further assessment of the resource model is planned between the East and West zones. The site drill program began during the quarter. Seventeen holes totaling 15,300 feet were drilled, including nine geotechnical holes, one hydrology hole and four other holes mainly testing areas of potential infrastructure, and three holes additional holes testing the western part of the Pebble deposit. Engineering The current phase of the engineering program consists of completion of the prefeasibility study for the Pebble Project, with delivery of the study expected in 2012. This work commenced during the first quarter with updating of the 2011 work schedule and estimates of costs. A number of key consultants were engaged in the first quarter (Q1) and the primary engineering contractor for the prefeasibility study was selected during the second quarter (Q2). Mining An optimization study of open pit mining commenced in Q1 with analysis of optimization parameters and geotechnical considerations. Planning continued through Q2, followed by the initiation of prefeasibility design work. The initial design work consisted of definition of optimum pit phasing, with confirmation of the pit slope designs. Preliminary production forecasts were generated, based on these preliminary phases, and rock stockpile site locations were selected. Analyses of overburden characteristics and open pit dewatering requirements were also conducted during Q2. Metallurgy Metallurgical testwork, primarily focused on molybdenum and secondary gold recovery, continued during the quarter. This data was used to complete initial design criteria for these components of the process and the criteria for the remainder of the plant were also reviewed. The results of geo-domain studies were used to update the mine optimization parameters and process plans. Waste and Water Management Preliminary alternatives for the waste rock site configurations were established during Q1 and 2011 site investigations to support the prefeasibility study design commenced in Q2. The design and operating criteria for the tailings storage facility were also advanced. Page 9 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 Infrastructure Consultants for the major infrastructure components, including the access road, port and power supply, have now been engaged. Measurements of metocean data (waves, current) at the proposed port site took place in Q1 and Q2. The information derived from these data collection programs will assist in designing the port facilities and the section of the access road that lies near the port site. Geotechnical investigations along the road route and at the proposed port site commenced during Q2 and will continue into Q3. Environmental and Socioeconomic Studies Comprehensive environmental and socioeconomic baseline study programs are ongoing at the Pebble Project, with the objectives of collecting data in the Pebble Project region and comparing annual variability. This data provides a foundation for the sound environmental design of the project and preparation of state and federal permit applications. The 2011 field programs have primarily focused on hydrology, water quality and fish resources. The Environmental Baseline Document ("EBD") is being finalized by the Pebble Partnership for expected public release during 2011. This document will be submitted with permit applications once mine engineering and a proposed development plan are completed. The EBD will present information and analysis on baseline physical, chemical, biological and social conditions based upon ongoing data collection by the Pebble Project environmental study team since 2004. Its purpose is to provide the public, regulatory agencies and the Pebble Partnership with a detailed compendium of pre-development environmental and socioeconomic conditions in the project area. Cultural Resource Studies Cultural resource studies have been carried out by the Pebble Partnership on all areas that might be affected by the Pebble Project, with the exception of possible road and port locations. Examination of the road and port sites will be undertaken once a decision is made regarding the exact location of these project features. Community Engagement An active program of stakeholder outreach continued throughout 2010, and included community meetings, stakeholder visits, presentations and event appearances, as well as stakeholder tours to the Pebble Project site and to operating mines in the United States and Canada. The focus of these outreach activities is to update stakeholders on the Pebble Project, to receive feedback on stakeholder priorities and concerns, and to advise participants about modern mining practices. The Pebble Partnership has a number of other initiatives underway to enhance stakeholder relationships, including: 1. The Pebble Fund for Sustainable Bristol Bay Fisheries & Communities – Established in 2008 with a five-year, US$5 million commitment, the goal of the Pebble Fund is to enhance the health and sustainability of regional fisheries and the communities they support. Grants are determined based on criteria and selections made by an advisory board comprised of citizens from communities throughout the Bristol Bay region. The fourth round of grants was announced in April 2011, when $778,250 was awarded to 18 worthy community development projects in southwest Alaska. The Pebble Fund has supported 83 community-based projects throughout southwest Alaska via grants totaling more than US$3.25 million, while leveraging nearly US$12 million in matching funds from other organizations. Page 10 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 2. An independent stakeholder dialogue process concerning the Pebble Project was initiated in late 2010 by the Keystone Center – a non-profit organization specializing in facilitating stakeholder- driven consultation processes concerning contentious, science-based issues. From December 3, 2010, the Keystone Process will convene Independent Science Panels of respected experts in a range of technical, scientific and sociological fields to review environmental and socioeconomic data compiled by the Pebble Partnership for the purpose of project engineering and permitting, while providing expert insight to Pebble Project stakeholders. The Pebble Partnership stakeholder relations plans for 2011 include a continuation of local community and state-wide stakeholder engagement, public education programming, as well as the stakeholder tour program. To date, the 2011 site tour program has hosted 34 tour groups and over 180 individual stakeholders. Additionally, about 75 stakeholders have visited operating mines in Alaska, Canada, Nevada, Utah and Wisconsin The Pebble Fund program will continue in 2011, along with the introduction of a Bristol Bay Marketplace Business Idea Competition for residents of Bristol Bay communities. The competition, sponsored by the Pebble Partnership and the Pebble Fund, provides the opportunity for local entrepreneurs to compete for funding to start or expand Bristol Bay-based businesses. A total of four Independent Science Panel (“ISP”) events are planned for the fall of 2011 as part of the Keystone process, to review the Pebble Partnership’s environmental baseline studies. ISP events to be held in 2011 will address: geology and geochemistry; hydrology and water quality; fish, wildlife and habitat; and social, economic and cultural dynamics. As the Pebble Project advances toward the completion of a prefeasibility study and preparation for project permitting under NEPA, it is expected that the Pebble Partnership will initiate a broad-based public consultation program to involve stakeholders in the process by which the project is being designed. This consultative process is currently expected to begin in fall 2011. Employment and Workforce Development The Pebble Partnership is one of the most important private sector employers in southwest Alaska. A total of 134 Bristol Bay residents were employed by the Pebble Project in 2010. Employee training and workforce development initiatives continue to expand. Workforce development initiatives at the Pebble Project include the provision of training in the areas of equipment operations, health, safety and environment. Working with the U.S. and Alaska Departments of Labour, the Pebble Partnership has established the first-ever registered apprenticeship training program to help local drill helpers become certified drillers. The Company is also investing in programs to train local workers to become environmental technicians, emergency medical technicians and bear guards. In addition, scholarships are available to high school students from the Bristol Bay region that are interested in pursuing studies at college and vocational/technical schools in the fields of project management, operations, geology, science, engineering and other areas of responsible resource development. 1.2.1.4 Legal Matters A lawsuit filed on July 29, 2009, in Anchorage Superior Court by Trustees for Alaska (an environmental law firm) on behalf of certain activists asserts that the Alaska Department of Natural Resources violated Alaska’s Constitution by granting exploration and temporary water use permits to the Pebble Partnership. Neither the Company nor the Pebble Partnership is named as a party; however, the Pebble Partnership has been granted intervener status in the case. While plaintiffs had requested a preliminary injunction to halt exploration activity at Pebble until the case is resolved, the court denied this request on November 27, 2009, and drilling has continued. The Superior Court heard the Trustees’ constitutional challenge in December 2010. Pending final submissions from the plaintiffs, it is expected to issue a final ruling within six months. The lawsuit is considered unlikely to succeed as it seeks to overturn the State’s regulatory regime for resource management in Alaska. Page 11 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 On February 23, 2011, the Company issued a news release announcing that it was in receipt of a new independent Preliminary Assessment of the Pebble Project, which is based on the information generated and provided by the Pebble Partnership and Northern Dynasty. The information provided by the Pebble Partnership and the Preliminary Assessment constitute a material change in the affairs of the Company because it changed the technical parameters and estimated net present value of the property by billions of dollars from the last such assessment done in 2004. Anglo American, the Company’s 50% partner in the Pebble Partnership, has asserted that the news release contained confidential information which is the property of the Pebble Partnership and was not authorized to be released, and Anglo American reserves all rights to claim that the release has damaged Anglo American and/or the Pebble Partnership. The Company has received legal advice that the news release was a permitted disclosure under the various agreements with Anglo American, and its issuance was a mandatory requirement under Canadian and US regulatory requirements. The Company does not believe that Anglo American’s allegations have any merit; however, it cannot give assurances about future events or actions by Anglo American. A citizen initiative certified by the Lake and Peninsula Borough has been filed for its October 2011 ballot. The proposed ‘Save Our Salmon’ initiative was certified in May 2011 and, if approved by local voters, would amend the borough’s development permitting code by precluding developments of more than 640 acres that cause “a significant adverse impact on existing anadromous waters. The Pebble Partnership filed suit against the initiative in Alaska Superior Court in May 2011. The court issued a decision in July 2011 deferring a ruling on the substantive matters raised until after the local election. In August 2011, the Pebble Partnership filed petition for review to the Alaska Supreme Court seeking an expeditious review of the case. The State of Alaska submitted an amicus brief in the case, arguing that the initiative “will interfere with the state’s management of Alaska’s mineral resources for the benefit of the state of Alaska.” Page 12 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 1.2.2 Other Properties 1.2.2.1 South Pebble, SP and KAK Claims Agreement between Full Metal Minerals and the Pebble Partnership The Pebble Partnership entered into a letter agreement with Full Metal Minerals Corp. and its subsidiary Full Metal Minerals (USA) Inc. (together, "FMM") in September 2010 (the "FMM Agreement"), which is subject to a due diligence review to the satisfaction of the Pebble Partnership. In the event that any issues uncovered by the Pebble Partnership during its due diligence review are satisfactorily resolved and the FMM Agreement becomes binding, the Pebble Partnership can earn a 60% interest in FMM’s South Pebble Claims (the "FMM Properties"), by incurring exploration expenditures of at least US$3 million and making annual payments of US$50,000 to FMM over a period ending on December 31, 2013. The venture between FMM and the Pebble Partnership will be in the form of a limited liability company ("LLC") operated by the Pebble Partnership. For the duration of the earn-in period and the term of the LLC, the Pebble Partnership will have an option to select and purchase claims that form part of the FMM Properties (the "Purchased Claims") at a price of US$25 per acre, provided that the Purchased Claims are declared or agreed to be outside of the current scope of the LLC, constitute no more than 20,000 acres, constitute a continuous block of claims and are located outside an "Exclusion Area" specified in the FMM Agreement. The FMM Properties total 542 claims covering approximately 135 square miles and located west and northwest of the ground held 100% by the Pebble Partnership; 99 of these claims, covering an area of 24.3 square miles, form the "Exclusion Area". Under the FMM Agreement, the Pebble Partnership was required to complete a Z-Axis Tipper Electromagnetic Technique ("ZTEM") airborne survey over the FMM Properties (completed) and make annual payments of US$50,000 to FMM (the first payment has been made). 1.2.2.2 Big Chunk North and South and Bonanza Hills Claims Northern Dynasty’s Purchase and Option Agreement with Liberty Star On June 29, 2010, Northern Dynasty entered into an agreement with Liberty Star Uranium and Metals Corp. and its subsidiary, Big Chunk Corp. (together, "Liberty Star"), pursuant to which Liberty Star sold 23.8 square miles of claims (the "Purchased Claims") to a US subsidiary of Northern Dynasty in consideration for both a US$1 million cash payment and a secured convertible loan from Northern Dynasty in the amount of US$3 million which accrues interest at 10% per annum compounded monthly (the "Loan"). The Loan is repayable, in cash or convertible into Liberty Star shares, after Northern Dynasty has spent at least US$1 million earning into a joint venture (discussed below). As of the date of this MD&A, Northern Dynasty has not spent US$1 million. In addition, subject to negotiating and signing a definitive earn-in option and joint venture agreement, Northern Dynasty can earn a 60% interest in Liberty Star’s remaining Big Chunk and Bonanza Hills projects in Alaska by spending US$10 million on those properties over six years. The Loan may be applied as part of the earn-in requirements, at Northern Dynasty’s discretion. As of the date of this MD&A, Northern Dynasty and Liberty Star have not entered into a joint venture agreement. The Pebble Partnership had the right but declined to acquire the Purchased Claims. Page 13 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 The total area of the properties is 186.7 square miles, and includes 95 Purchased Claims; 428 Big Chunk South claims (102.9 square miles); 184 Big Chunk North claims (46 square miles); and 56 Bonanza Hills claims (14 square miles). All are located in the vicinity of Pebble. In 2010, Northern Dynasty funded helicopter borne ZTEM and aeromagnetic geophysical surveys over the Big Chunk North and Bonanza Hills properties and a two-hole air rotary drill program on the Big Chunk South property. 1.2.3 Market Trends Copper prices showed a significant increase between late 2003 and mid-2008, and after a steep decline in late 2008 and early 2009, have been steadily increasing since that time. Although the gold price has dropped from time to time, over the past five years the average annual price has steadily increased. This upward trend accelerated in 2009 in response to the global economic uncertainty that began in mid-2008. Molybdenum prices have been more volatile than gold or copper, beginning an upward trend in 2003 that reached a peak of US$34/lb in October 2005, decreasing through 2006, then rising in 2007 until the latter part of 2008, when they dropped significantly. This decrease continued until May 2009. Since that time, prices have been variable, but on an overall upward trend. Average annual prices as well as the average price so far in 2011 for copper, gold and molybdenum are shown in the table below: Year Average metal price (US$) Copper Gold Molybdenum 2008 3.16/lb 871/oz 29.70/lb 2009 2.34/lb 974/oz 11.29/lb 2010 3.42/lb 1,228/oz 15.87/lb 2011 (to the date of this MD&A) 4.27/lb 1,481/oz 16.50/lb Source: LME Official Cash Price as provided at www.metalprices.com Page 14 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 1.3 Selected Annual Information The following consolidated financial statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board ("IASB") and interpretations of the IFRS Interpretations Committee ("IFRIC"). The Company adopted and transitioned to IFRS as of January 1, 2008. All figures are expressed in thousands of Canadian dollars, except per share amounts. As at As at As at December 31 December 31 December 31 Statements of Financial Position 2010 2009 2008 Property, plant and equipment $ – $ – $ 11 Investment in the Pebble Partnership 99,306 104,937 121,611 Mineral property interests 1,055 – – Current assets 43,886 45,133 46,282 Total assets 144,247 150,070 167,904 Shareholders’ equity 140,060 146,070 163,315 Other liabilities 3,633 3,807 4,441 Current liabilities 554 193 148 Total shareholders’ equity and liabilities 144,247 150,070 167,904 Working capital $ 43,332 $ 44,940 $ 46,134 Year ended Year ended Year ended Expenses (income) December 31 2010 December 31 2009 December 31 2008 Conference and travel $ 288 $ 349 $ 273 Depreciation – – 4 Donations 12 445 – Exploration 1,800 321 408 Insurance 248 263 407 Legal, accounting and audit 274 354 370 Office costs 653 331 226 Salaries 2,188 1,453 1,381 Shareholder communication 431 750 384 Trust and filing 224 199 235 Foreign exchange loss (gain) 138 130 (9,130 ) Deferred income tax expense (recovery) 30 (25 ) – Impairment of marketable securities – 15 – Impairment of property, plant and equipment (“PPE”) – 11 – Interest income (544 ) (335 ) (1.115 ) Share-based compensation 8,373 8,479 7,707 Loss for the year $ 14,115 $ 12,740 $ 1,150 Basic and diluted loss per common share $ 0.15 $ 0.14 $ 0.01 Weighted average number of common shares outstanding 93,779 92,828 92,544 Page 15 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 1.4 Summary of Quarterly Results Figures are expressed in thousands of Canadian dollars, except per share amounts. Small differences are due to rounding. June 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 2011 2011 2010 2010 2010 2010 2009 2009 Other assets $ 1,055 $ 1,055 $ 1,055 $ 1,055 $ 1,055 $ – $ – $ – Equity investment in PLP 96,301 96,810 99,306 102,741 106,295 101,423 104,937 106,904 Current assets 44,925 45,302 43,886 43,421 44,955 46,632 45,133 45,236 Total assets 142,281 143,167 144,247 147,217 152,305 148,055 150,070 152,140 Equity 138,566 139,261 140,060 143,287 148,305 144,322 146,070 151,797 Other liabilities 3,523 3,542 3,633 3,737 3,825 3,645 3,807 – Current liabilities 192 364 554 193 175 88 193 343 Total shareholders’ equity and liabilities 142,281 143,167 144,247 147,217 152,305 148,055 150,070 152,140 Working capital 44,733 44,938 43,332 43,228 44,780 46,544 44,940 44,893 Comprehensive Loss Expenses Conference and travel 25 103 61 44 55 128 59 101 Depreciation – – – – – – (12 ) 2 Donations 866 – 4 5 – 3 – – Exploration 141 316 850 653 150 147 241 11 Foreign exchange loss (gain) 17 79 112 110 (105 ) 21 12 74 Insurance 68 67 61 61 62 64 66 65 Impairment on marketable securities – – – – – – 15 – Legal, accounting and audit 41 53 122 86 36 30 128 130 Office costs 308 197 137 183 226 107 33 53 Salaries 676 622 436 580 747 425 249 361 Shareholder communication 97 176 77 98 158 98 113 230 Share-based compensation 2,782 6,501 1,588 1,543 4,340 902 1,346 1,313 Trust and filing 48 181 7 10 42 165 7 18 Total before undernoted 5,069 8,295 3,455 3,373 5,711 2,090 2,257 2,358 Interest income (225 ) (197 ) (198 ) (175 ) (90 ) (81 ) (89 ) (111 ) Impairment loss on PPE – – – – – – 11 – Deferred income tax – – 21 41 3 (35 ) (25 ) – Loss for the period 4,844 8,098 3,278 3,239 5,624 1,974 2,154 2,247 Loss (gain) on marketable securities – – 1 (1 ) 1 – – 2 Exchange difference on translation of the Pebble Partnership 509 2,496 3,435 3,554 (4,872 ) 3,514 1,967 9,216 Deferred income tax (19 ) (91 ) (124 ) (129 ) 176 (127 ) (609 ) – Comprehensive loss 5,334 $ 10,503 $ 6,590 $ 6,663 $ 929 $ 5,361 $ 3,512 $ 11,465 Basic and diluted loss per common share $ 0.05 $ 0.09 $ 0.03 $ 0.03 $ 0.06 $ 0.02 $ 0.02 $ 0.02 Weighted average number of common shares outstanding YTD (thousands) 94,882 94,567 93,973 93,857 93,815 93,254 93,063 92,958 Page 16 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 1.5 Results of Operations The following financial data has been prepared in accordance with IFRS as issued by the IASB and interpretations of the IFRS Interpretations Committee ("IFRIC") and are expressed in Canadian dollars unless otherwise stated. The Company’s operations and business are not driven by seasonal trends, but rather are driven towards the achievement of project milestones such as the achievement of various technical, environmental, socioeconomic and legal objectives, including obtaining the necessary permits, completion of pre-feasibility and final feasibility studies, preparation of engineering designs, as well as receipt of financings to fund these objectives along with mine construction. 1.5.1 Results of Comprehensive Loss for the Quarter Ended June 30, 2011 vs. 2010 Loss was $4.8 million for the current quarter as compared to $5.6 million in the comparative period of 2010. The decrease was mainly attributable to lower share-based compensation recognized in the current quarter. Share-based compensation is measured by determining the fair value of the share purchase options at the grant date for each tranche and is recognized over the period during which the share purchase option vests. Share-based compensation decreased to $2.8 million from $4.3 million in the comparable period of 2010 as a result of the Company not granting share purchase options in the current quarter as compared 2.7 million share purchase options which were granted in Q2 of 2010 and the reduced vesting of options previously granted. The weighted average grant date fair value per share purchase option was $6.57 determined using the Black Scholes model with the following weighted average assumptions: risk free rate of 2.29%; expected volatility of 64% and expected life of 4.15 years. The Company donated 75,000 common shares to the University of British Columbia during the quarter and recognized a $0.9 million expense which was based on the quoted market value per common share on the date of issue. The Company recorded exploration costs of $0.1 million (2010 – $0.1 million) and salaries of $0.7 million (2010 – $0.7 million) during the quarter as it continued with further analyses of the Pebble Project following the independent Preliminary Assessment Technical Report issued in February 2011. As a result of the appreciation of the Canadian dollar against the US dollar from approximately 1USD=0.97CAD at April 1, 2011 to 1USD=0.96CAD at June 30, 2011, the Company recorded an exchange loss of $0.5 million in other comprehensive loss related to the exchange difference on the equity investment in the Pebble Partnership, which has a US dollar functional currency. This compared to the gain recognized in 2010 of $4.9 million when the Canadian dollar decreased from 1USD=1.02CAD at April 1, 2010 to 1USD=1.06CAD at June 30, 2010. 1.5.2 Results of Comprehensive Loss for the Six Months Ended June 30, 2011 vs. 2010 Loss was $12.9 million for the current period as compared to $7.6 million in the comparative period of 2010. The increase was mainly attributable to higher share-based compensation and the donation expense recognized in the current period. Share-based compensation is measured by determining the fair value of the share purchase options at the grant date for each tranche and is recognized over the period during which the share purchase option vests. Share-based compensation increased to $9.3 million from $5.2 million in the comparable period of 2010 as a result of the Company granting options in the current period and the reduced vesting of options that were granted in prior periods. The increase was also due to the increase in the weighted average grant date fair value per share purchase option which was $6.57 (2010 – $3.87) determined using the Black Scholes model with the following weighted average assumptions: risk free rate of 2.29%; expected volatility of 64% and expected life of 4.15 years. Page 17 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 The Company donated 75,000 common shares to the University of British Columbia during the period and recognized a $0.9 million expense which was based on the quoted market value per common share on the date of issue. The Company recorded exploration costs of $0.5 million (2010 – $0.3 million) and salaries of $1.3 million (2010 – $1.2 million) during the period as it completed and issued an independent Preliminary Assessment Technical Report in February 2011 and incurred costs relating to the preparation and analysis thereof. As a result of the appreciation of the Canadian dollar against the US dollar from approximately 1USD=0.99CAD at January 1, 2011 to 1USD=0.96CAD at June 30, 2011, the Company recorded an exchange loss of $3.0 million in other comprehensive loss related to the exchange difference on the equity investment in the Pebble Partnership, which has a US dollar functional currency. This compared to the gain recognized in 2010 of $1.4 million when the Canadian dollar depreciated against the US dollar from 1USD=1.05CAD at January 1, 2010 to 1USD=1.06CAD at June 30, 2010. 1.5.3 Cash Flows for the Six Months Ended June 30, 2011 vs. 2010 Net cash used in operations increased to $3.3 million in the current period from $2.5 million in the prior year. The increase was due to higher exploration costs, office costs, and salaries. The Company increased cash from financing activities as a result of higher interest income earned due to increase in interest rates. In the comparable prior period the Company used cash to advance a loan to Liberty Star for $3.2 million and acquire the Liberty Star claims for $1.1 million. As a result of the exercise of share purchases options, the Company increased cash resources by $4.2 million in 2011 as compared to $3.3 million in 2010. 1.5.4 Financial position as at June 30, 2011 vs. December 31, 2010 The Company’s total assets decreased to $142.3 million from $144.2 million. The decrease was mainly attributable to the decrease in the carrying value of the Group’s investment in the Pebble Partnership as a result of the exchange loss of $3.0 million recognized on translation (refer 1.5.2) . Cash and cash equivalents increased by $1.1 million as the Company received proceeds of $4.2 million from the issue of shares on exercise of share purchase options and utilized $3.3 million in its operations. 1.5.5 Investment in the Pebble Partnership As indicated in section 1.2.1.2, the Company has determined that, in accordance with IFRS, it has joint control of the Pebble Partnership and applies the equity method to account for its investment in the Pebble Partnership. Expenditures incurred on the Pebble Project through the Pebble Partnership are being funded 100% by Anglo American. Anglo American’s total contributions from inception to June 30, 2011, total $366.4 million (US$346.8 million). For the period ended June 30, 2011, the Pebble Partnership incurred losses of $29.2 million (2010 – $24.9 million). Exploration costs in the same period increased marginally to $26.2 million from $22.3 million in the comparative period of 2010. The Pebble Partnership continues to focus on the preparation of a prefeasibility study for the Pebble Project which is expected to be delivered in 2012. The main exploration expenditures during the six months ended June 30, 2011, were for: Page 18 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 engineering (2011 – $5.1 million; 2010 – $4.9 million); environmental planning and testing (2011 – $5.6 million; 2010 – $7.0 million); site activities (2011 – $10.3 million; 2010 – $6.9 million); and public affairs (2011 – $5.2 million; 2010 – $3.5 million). For further discussion on exploration activities and the technical programs underway on the Pebble Project, please refer to section 1.2.1.3. 1.5.6 Discussion of Quarterly Trends The Company’s investment in the Pebble Partnership is carried in US dollars. Exchange differences arising from the translation of the Group’s investment in the Pebble Partnership are taken directly to the foreign currency translation reserve in other comprehensive loss. Except for Q2 of 2010, the Company has recorded an exchange loss in other comprehensive loss in seven of the past eight quarters as a result of the depreciation of the US dollar. This has resulted in a decrease in the carrying value of the Company’s investment in the Pebble Partnership on the statements of financial position over the same corresponding period. The following table summarizes the movement in the US dollar to the Canadian dollar and the resulting exchange differences recognized in each quarter: 1CAD for 1USD Period USD movement to CAD Start End Recognized (gain) loss Q3 2009 Depreciation $1.16 $1.07 $9.2 million Q4 2009 Depreciation $1.07 $1.05 $2.0 million Q1 2010 Depreciation $1.05 $1.02 $3.5 million Q2 2010 Appreciation $1.02 $1.06 $(4.9) million Q3 2010 Depreciation $1.06 $1.03 $3.6 million Q4 2010 Depreciation $1.03 $0.99 $3.4 million Q1 2011 Depreciation $0.99 $0.97 $2.5 million Q2 2011 Depreciation $0.97 $0.96 $0.5 million FY 2009 Depreciation $1.22 $1.05 $16.7 million FY 2010 Depreciation $1.05 $0.99 $5.6 million Share-based compensation expense also typically fluctuates based on the timing of share purchase option grants and the vesting periods associated with these grants. The fair value of share purchase options is recognized at the grant date and the compensation expense for each tranche is recognized over the period during which the share purchase options vest. As a result of the vesting of certain tranches of prior share purchase options granted, share-based compensation decreased until Q2 of 2010. In Q2 of 2010, the Company granted new share purchase options which resulted in the increase in share-based compensation recognized. In Q3 and Q4 of 2010, share-based compensation decreased as a result of the vesting of certain tranches of these options and the inclusion of forfeiture rates. In Q1 of 2011, share-based compensation increased as a result of share purchase options granted in the quarter. In Q2 of 2011, share-based compensation decreased compared to Q1 of 2011 as a result of the reduced vesting of share purchase options previously granted as well as no new share purchase options were issued during the three months ended June 30, 2011. Page 19 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 1.6 Liquidity Historically, the Company's sole source of funding has been the issuance of equity securities for cash, primarily through private placements to sophisticated investors and institutions. Except for 2008, when the Company issued common shares pursuant to a private placement financing, the Company has in each past year issued common shares pursuant to the exercise of share purchase options. The Company's access to financing is always uncertain. There can be no assurance of continued access to significant equity funding. The funding of expenditures on the Pebble Project held through the Pebble Partnership is currently being provided by Anglo American (described below) with US$91 million being funded in 2011. Excluding cash and cash equivalents in the Pebble Partnership, Northern Dynasty has approximately $42 million in cash and cash equivalents for its own operating requirements. With the Pebble Project fully funded, the Company believes it has sufficient resources to cover its short to medium term cash requirements. As discussed in section 1.2.2, the Company is in a 50:50 limited partnership with Anglo American. Each of the Company and Anglo American effectively has equal rights in the Pebble Partnership through wholly-owned affiliates. To maintain its 50% interest in the Pebble Partnership, Anglo American is required to make staged cash investments into the Pebble Partnership aggregating to US$1.5 billion. Anglo American completed the initial US$125 million commitment to fund prefeasibility study expenditures in 2008. After approval of the prefeasibility report, in order to retain its 50% interest, Anglo American is required to commit to further expenditures which will bring its total investment to at least US$450 million, which amount is to be expended producing a final feasibility study and in related activities, the completion of which is expected to take the Pebble Partnership to a production decision. Upon an affirmative decision to develop a mine, Anglo American is required to commit to the remaining portion of the total investment of US$1.5 billion in order to retain its 50% interest in the Pebble Partnership. At June 30, 2011, the Company had working capital of approximately $44.7 million as compared to $43.3 million at December 31, 2010. The Company has no long term debt, capital lease obligations, operating leases or any other long term obligations. The Company has no "Purchase Obligations", defined as any agreement to purchase goods or services that is enforceable and legally binding on the Company that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The Pebble Partnership has purchase orders for goods and services relating to its activities on the Pebble Project. It also is responsible for all maintenance payments on the property and routine office leases. All costs are funded through existing cash resources in the Pebble Partnership which are being funded by Anglo American and are in the normal course of operations. The Company is responsible for all maintenance payments on the Purchased Claims (refer 1.2.2.2) . Subject to entering into a definitive joint venture agreement with Liberty Star, which as of the date of this MD&A no definitive joint venture agreement has been entered into, the Company would be required to spend US$10 million in exploration and claims maintenance over 6 years. Page 20 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 1.7 Capital Resources The Company has no long-term debt and had 94,974,174 common shares issued and outstanding at June 30, 2011. The Company had no commitments for material capital expenditures as of June 30, 2011. The Pebble Partnership, which is being funded by Anglo American, has an approximate US$1.8 million commitment to the Pebble Fund for Sustainable Bristol Bay Fisheries & Communities over the next two years (refer to Community Engagement in 1.2.1.3.2) The Company has no lines of credit or other sources of financing. 1.8 Off-Balance Sheet Arrangements None. 1.9 Transactions with Related Parties The Company and its subsidiaries transact with Hunter Dickinson Services Inc. ("HDSI"), a private company which has certain directors and other key management personnel who are close business associates that are also key management personnel of the Company. Pursuant to a management services agreement with HDSI, HDSI provides geological, corporate development, administrative and management services to the Company at annually set rates and incurs third party costs on behalf of the Company which are reimbursed by the Company at cost. Costs for services rendered by HDSI to the Company for the three and six months ended June 30, 2011 were $0.8 million and $1.7 million respectively as compared to $0.4 million and $0.9 million respectively for the comparative period ended June 30, 2010. The increase over 2010 is due to the Company using additional resources provided by HDSI to assist with ongoing administration and management of the Company including assisting with the independent preliminary assessment, continuous disclosure obligations, shareholder communications and investor relations, as well as assisting with the Company’s role as partner in the Pebble Partnership. The costs for expenses paid by HDSI and reimbursed by the Company for the three and six months ended June 30 2011 were $0.1 million and $0.5 million respectively as compared to $0.3 million and $0.5 million for the three and six months ended June 30, 2010. Compensation paid to key management personnel (directors and senior management comprising the Senior Vice President ("VP"), Corporate Development; VP, Engineering and VP, Public Affairs) for the three and six months ended June 30, 2011 comprised salaries of $0.4 million (2010 – $0.2 million) and $0.8 million (2010 – $0.4 million) respectively and share-based compensation of $1.4 million (2010 – $1.7 million) and $4.9 million (2010 – $2.1 million) respectively. 1.10 Fourth Quarter Not applicable. Page 21 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 1.11 Proposed Transactions There are no proposed asset or business acquisitions or dispositions, other than those in the ordinary course, before the Board of Directors for consideration. 1.12 Critical Accounting Estimates The Company's significant accounting policies are presented in Note 2 in the notes to the consolidated financial statements for the year ended December 31, 2010 and the Interim Financial Statements for the three and six months ended June 30, 2011. The preparation of these Interim Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the end of the reporting period presented and reported amounts of expenses during said reporting period. Actual outcomes could differ from these estimates. The Interim Financial Statements include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout the Interim Financial Statements, and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and future periods if the revision affects both current and future periods. These estimates are based on historical experience, current and future economic conditions and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Significant assumptions about the future and other sources of estimation uncertainty at the end of the reporting period, that could result in a material adjustment to the carrying amounts of assets and liabilities in the event that actual results differ from assumptions made, include, but are not limited to, the following: i. the inputs used in measuring share-based compensation expense included in loss for the period; and ii. the provision for the income tax recovery included in the loss for the period and the composition of deferred income tax liabilities included in the condensed consolidated interim statements of financial position. 1) Mineral resources and the carrying value of the Company’s investment in the Pebble Partnership Mineral resources are estimated by professional geologists and engineers in accordance with recognized industry, professional and regulatory standards. These estimates require inputs such as future metals prices, future operating costs, and various technical geological, engineering, and construction parameters. Changes in any of these inputs could cause a significant change in the resources estimates which in turn could have a material effect on the carrying value of the Company’s investment in the Pebble Partnership. 2) Impairment analysis of assets At the end of each reporting period the carrying amounts of the Company’s assets are reviewed to determine whether there is any indication that those assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment, if any. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss is recognized in the profit or loss for the period. For the purposes of impairment testing, exploration and evaluation assets are allocated to cash-generating units to which the exploration activity relates. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs. Page 22 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 Recoverability of the carrying amount of the exploration and evaluation assets is dependent on successful development and commercial exploitation, or alternatively, sale of the respective assets. Changes in any of the assumptions used to determine impairment testing could materially affect the results of the analysis. At June 30, 2011, the Company reviewed the carrying value of its assets and determined that there were no indicators of impairment. 3) Restoration, rehabilitation, and environmental obligations An obligation to incur restoration, rehabilitation and environmental costs arises when environmental disturbance is caused by the exploration or development of a mineral property interest. Such costs arising from the decommissioning of plant and other site preparation work, discounted to their net present value, are provided for and capitalized at the start of each project to the carrying amount of the asset, along with a corresponding liability as soon as the obligation to incur such costs arises. The timing of the actual rehabilitation expenditure is dependent on a number of factors such as the life and nature of the asset, the operating license conditions, and when applicable the environment in which the mine operates. Discount rates using pre-tax rates that reflect the time value of money are used to calculate the net present value. These costs are charged against profit or loss over the economic life of the related asset, through amortization using either the unit-of-production or the straight line method. The corresponding liability is progressively increased as the effect of discounting unwinds creating an expense recognized in profit or loss. Decommissioning costs are also adjusted for changes in estimates. Those adjustments are accounted for as a change in the corresponding capitalized cost, except where a reduction in costs is greater than the unamortized capitalized cost of the related assets, in which case the capitalized cost is reduced to nil and the remaining adjustment is recognized in profit or loss. The operations of the Company may in the future be affected from time to time in varying degree by changes in environmental regulations or changes in estimates used in determining restoration and rehabilitation obligations. Both the likelihood of new regulations or degree of changes in estimates and their overall effect upon the Company are not predictable. At June 30, 2011, the Company has no material restoration, rehabilitation and environmental obligations as the disturbance to date is minimal. 4) Share-based compensation expense From time to time, the Company through its Board of Directors, grants share purchase options to directors, employees and service providers. The Company uses the Black-Scholes option pricing model to estimate the fair value for these options. This model, and other models which are used to fair value options, require inputs such as expected volatility, expected life to exercise, and interest rates. Changes in any of these inputs could cause a significant change in the share-based compensation expense charged in a period. Page 23 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 During the six months ended June 30, 2011, the Company granted share purchase options and the share-based compensation expense recognized relates to the vesting of tranches from this grant and grants of share purchase options in prior year grants. The following are the weighted average assumptions and inputs used to estimate the fair value of share purchase options granted during the period: Risk-free interest rate 2.29% Expected life 4.15 years Expected volatility 64% Grant date share price $13.78 Expected dividend yield Nil 5) Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are computed based on differences between the carrying amounts of assets and liabilities on the statements of financial position and their corresponding tax values, generally using the substantively enacted or enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets also result from unused loss carry forwards, resource-related pools and other deductions. A deferred tax asset is only recognized to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. A deferred tax liability would arise on the carrying value of the investment in the Pebble Partnership as a result of historical transactions. The Company recognizes net deferred tax liabilities as it believes it does not control the timing of the reversal of these temporary differences even though management has made the judgment that the reversal is not expected to occur in the foreseeable future. 1.13 Changes in Accounting Policies including Initial Adoption Accounting Standards, Interpretations and Amendments to Existing Standards Effective January 1, 2011, the Group adopted new and revised IFRS that were issued by the IASB. The application of these new and revised IFRS has not had any material impact on the amounts reported for the current and prior years but may affect the accounting for future transactions or arrangements. 1) Amendment to IAS 32 Financial Instruments: Presentation Rights, options or warrants to acquire a fixed number of the Group’s equity instruments for a fixed amount of any currency will be allowed to be classified as equity instruments so long as the Group offers the rights, options or warrants pro rata to all of the Group’s existing owners of the same class of the Group’s non-derivative equity instruments. 2) Amendments to IFRS 3 Business Combinations Clarification that the contingent consideration arising in a business combination previously accounted for in accordance with IFRS 3 that is outstanding at the adoption date continues to be accounted for in accordance with IFRS 3. Page 24 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 Limiting the accounting policy choice to measure non-controlling interests upon initial recognition at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets to instruments that give rise to a present ownership interest and that currently entitle the holder to a share of net assets in the event of liquidation. Expansion of the guidance with regards to the attribution of the market-based measure of an acquirer’s share-based payment awards issued in exchange for acquiree awards. 3) Amendments to IAS 27 Consolidated and Separate Financial Statements Clarification that the amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates, IAS 28 Investments in Associates, and IAS 31 Interests in Joint Ventures resulting from IAS 27 should be applied prospectively, except for amendments resulting from renumbering. 4) Amendments to IFRS 7 Financial Instruments: Disclosures Amendment to disclosure requirements, specifically, ensuring qualitative disclosures are made in close proximity to quantitative disclosures in order to better enable financial statement users to evaluate an entity’s exposure to risks arising from financial instruments. 5) Amendments to IAS 1 Presentation of Financial Statements Clarification that the breakdown of changes in equity resulting from transactions recognized in other comprehensive income is required to be presented in the statement of changes in equity or in the notes to the financial statements. 6) Amendments to IAS 24 Related Party Disclosures Amendment of the definition for related parties. 7) Amendments to IAS 34 Interim Financial Reporting Addition of further examples of events or transactions that require disclosure and removal of references to materiality when discussing other minimum disclosures. Accounting standards not yet effective 1) Effective for annual periods beginning on or after July 1, 2011 • Amendments to IFRS 7, Financial Instruments: Disclosures Increase in disclosure with regards to the transfer of financial assets, especially if there is a disproportionate amount of transfer transactions that take place around the end of a reporting period. 2) Effective for annual periods beginning on or after July 1, 2012 • Amendments to IAS 1, Presentation of Financial Statements Requires an entity to group items presented in the Statement of Comprehensive Income on the basis of whether they may be reclassified to earnings subsequent to initial recognition. For those items presented before taxes, the amendments to IAS 1 also require that the taxes related to the two separate groups be presented separately. Earlier adoption is permitted. 3) Effective for annual periods beginning on or after January 1, 2013 • New standard IFRS 10, Consolidated Financial Statements Builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company and provides additional guidance where it is difficult to assess. IFRS 10 replaces the consolidation requirements in SIC-12, Consolidation–Special Purpose Entities, and IAS 27, Consolidated and Separate Financial Statements. Concurrently with the issuance of IFRS 10, IAS 27 and IAS 28, Investments in Associates were revised and reissued as IAS 27, Separate Financial Statements and IAS 28, Investments in Associates and Joint Ventures, to align with the new consolidation guidance. Page 25 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 • New standard IFRS 11, Joint Arrangements Under IFRS 11, joint arrangements are classified as joint operations or joint ventures based on the rights and obligations of the parties to the joint arrangements rather than its legal form. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (“joint operators”) have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (“joint venturers”) have rights to the net assets of the arrangement. IFRS 11 requires that a joint operator recognize its portion of assets, liabilities, revenues and expenses of a joint arrangement, while a joint venturer recognizes its investment in a joint arrangement using the equity method. IFRS 11 supercedes IAS 31, Interests in Joint Ventures and SIC-13, Jointly Controlled Entities-Non-monetary Contributions by Venturers. The Company is currently evaluating the impact that IFRS 11 may have on its Interim Financial Statements. • New standard IFRS 12, Disclosure of Interests in Other Entities Provides the disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates, and consolidated structured entities. • New standard IFRS 13, Fair Value Measurement Defines fair value and sets out in a single IFRS a framework for measuring fair value and requires disclosures about fir value measurements. The standard does not determine when an asset, a liability or an entity’s own equity instrument is measured at fair value. Rather, the measurement and disclosure requirements of IFRS 13 apply when another IFRS requires or permits the item to be measured at fair value (with limited exceptions). The Company has not early adopted these new or revised standards and is currently assessing the impact that these standards will have on the condensed consolidated interim financial statements. 4) Effective for annual periods beginning on or after January 1, 2015 • New standard IFRS 9, Financial Instruments, Classification and Measurement The standard represent phase 1 of 3 phases to replace IAS 39, Financial Instruments: Recognition and Measurement, in its entirety. When completed IFRS 9, Financial Instruments, will be the new standard for the financial reporting of financial instruments that is principles-based and less complex than IAS 39. Phase 1 was issued In November 2009 and amended in October 2010 and addressed the classification and measurement of financial assets and financial liabilities. This standard requires that all financial assets be classified as subsequently measured at amortized cost or at fair value based on the Group’s business model for managing financial assets and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified as subsequently measured at amortized cost except for financial liabilities classified as at fair value through profit or loss, financial guarantees and certain other exceptions. The complete IFRS 9 is anticipated to be issued during the second half of 2011. On July 22, 2011, the IASB tentatively agreed to defer the mandatory effective date of IFRS 9 from annual periods beginning on or after January 1, 2013 (with earlier application permitted) to annual periods beginning on or after January 1, 2015 (with earlier application still permitted). The IASB will propose the deferral of IFRS 9 in an exposure draft with a 60 day comment period. Page 26 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 The Company anticipates that the adoption of this standard will have no material impact except for additional disclosures 1.14 Financial Instruments and Other Instruments The loan advanced by the Group as part of it consideration for claims purchased has an equity conversion option. This equity conversion feature has been determined to be an embedded derivative which requires separation from the loan receivable. For embedded derivatives identified for separation, the fair value of the derivative must be calculated as of the inception date and at each reporting date subsequent to the inception date. The Group has determined that the fair value of the equity conversion option at the date of inception and at June 30, 2011, is of nominal value as no definitive earn-in and joint venture agreement has been entered into and the first US$1 million has not been incurred by the Group in respect to the JV Agreement claims. 1) Non-derivative financial assets: The Company has the following non-derivative financial assets: financial assets at fair value through profit or loss, available-for-sale financial assets, and loans and receivables. Financial assets at fair value through profit or loss ("FVTPL") A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated as at FVTPL if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company’s documented risk management or investment strategy. Attributable transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Available-for-sale financial assets Available-for-sale ("AFS") financial assets are non-derivatives that are either designated as AFS or are not classified as (i) loans and receivables, (ii) held-to-maturity investments or (iii) financial assets as at FVTPL. The Group’s investments in marketable securities are classified as AFS financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses and foreign currency differences on AFS monetary items, are recognized in other comprehensive income or loss. When an investment is derecognized, the cumulative gain or loss in the investment revaluation reserve is transferred to profit or loss. The fair value of AFS monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of the reporting period. The change in fair value attributable to translation differences that result from the amortized cost of the monetary asset is recognized in profit or loss. The change in fair value of AFS equity investments are recognized directly in equity. Page 27 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are initially recognized at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and receivables comprise amounts receivable including the Liberty Star loan receivable and balances receivable from a related party. 2) Non-derivative financial liabilities: The Company has the following non-derivative financial liabilities: amounts payable and other liabilities. Such financial liabilities are recognized initially at fair value net of any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method. 3) Financial Risk Management The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board approves and monitors the risk management processes, inclusive of documented investment policies, counterparty limits, and controlling and reporting structures. The type of risk exposure and the way in which such exposure is managed is provided as follows: Credit Risk Credit risk is the risk of potential loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations. The Company’s credit risk is primarily attributable to its liquid financial assets, including cash and cash equivalents, amounts receivable and balances receivable from related parties. The Company limits the exposure to credit risk in its cash and cash equivalents by only investing its cash and cash equivalents with high-credit quality financial institutions in business and saving accounts, guaranteed investment certificates, and in government treasury bills which are available on demand by the Company for its programs. The Company’s loan receivable from Liberty Star is secured by other claims and assets owned by Liberty Star in Alaska, USA. Management has assessed the recoverability of the loan as at the end of the reporting period and based on financial information available on Liberty Star, management has concluded that there is no objective evidence of impairment to the loan and considers the full amount to be recoverable. Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations when they become due. The Company ensures, as far as reasonably possible, it will have sufficient capital in order to meet short term business requirements, after taking into account cash flows from operations and the Company’s holdings of cash and cash equivalents. The Company believes that these sources will be sufficient to cover its short to medium term cash requirements. In the longer term on completion of the US$1.5 billion expenditure by Anglo American, any further expenditure will need to be funded by the Group and Anglo American on a 50:50 basis. The Group currently does not have the required funding to meet these long term obligations should they arise. Page 28 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 The Company’s cash and cash equivalents are currently invested in business accounts and guaranteed investment certificates which are available on demand. The Company has no contractual obligations other than current trade and related party payables. Further discussion can be found in Section 1.6 Liquidity. Foreign Exchange Risk The Company is exposed to foreign exchange risk as some of its cash and cash equivalents are held in US dollars. Also certain of the Company’s corporate expenses are incurred in US dollars. As a consequence, the Company’s operations are subject to currency transaction risk and currency translation risk. The operating results and financial position of the Company are reported in Canadian dollars in the Company’s condensed consolidated interim financial statements. The fluctuation of the US dollar in relation to the Canadian dollar will consequently have an impact upon the losses incurred by the Company and may also affect the value of the Company’s assets and the amount of shareholders’ equity. The Company has not entered into any agreements or purchased any instruments to hedge possible currency risks at this time. The exposure of the Company’s cash and cash equivalents, amounts receivable and amounts receivable from related parties to foreign exchange risk (in thousands of dollars) is as follows: Currency As at June 30, 2011 As at December 31, 2010 Foreign Amount in Foreign Amount in currency amount Canadian dollars currency amount Canadian dollars US dollars Amounts receivable $ 3,301 $ 3,183 $ 3,153 $ 3,136 Cash and cash equivalents 90 87 49 48 Total financial assets $ 3,391 $ 3,270 $ 3,202 $ 3,458 The exposure of the Company’s amounts payable and other liabilities and amounts due to related parties to foreign exchange risk (in thousands of dollars) is as follows: Currency As at June 30, 2011 As at December 31, 2010 Amount in Foreign currency Amount in Canadian Foreign currency Canadian amount dollars amount dollars US dollars Amounts payable and other liabilities $ 16 $ 16 $ 1 $ 1 Total financial liabilities $ 16 $ 16 $ 1 $ 1 Based on the above net exposures and assuming that all other variables remain constant, a 10% depreciation of the Canadian dollar against the US dollar would result in a decrease in the loss of approximately $325,000 in the period (2010 – $333,000). This sensitivity analysis includes only outstanding foreign currency denominated monetary items and excludes the effect of any translation adjustments for the investment in the Pebble Partnership. Page 29 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 Interest rate risk The Company is subject to interest rate risk with respect to its investments in cash and cash equivalents. The Company’s policy is to invest cash at fixed rates of interest and cash reserves are to be maintained in cash and cash equivalents in order to maintain liquidity, while achieving a satisfactory return for shareholders. Fluctuations in interest rates when the cash and cash equivalents mature impact interest income earned. Assuming that all other variables remain constant, a 100 basis points change representing a 1% increase or decrease in interest rates would have resulted in a decrease or an increase in the loss (in thousands of dollars) as follows: Three months ended June 30 Six months ended June 30 2011 2010 2011 2010 Decrease or increase in loss $ 104 $ 110 $ 203 $ 214 Commodity price risk While the value of the Company’s core mineral resource property, held through its 50% interest in the Pebble Partnership, is related to the price of gold, copper and molybdenum and the outlook for these minerals, the Company currently does not have any operating mines and hence does not have any hedging or other commodity based risks in respect of its operational activities. Gold, copper, and molybdenum prices have fluctuated widely historically and are affected by numerous factors outside of the Company's control, including, but not limited to, industrial and retail demand, central bank lending, forward sales by producers and speculators, levels of worldwide production, short-term changes in supply and demand because of speculative hedging activities, and certain other factors related specifically to gold. Capital Management The Company's policy is to maintain a strong capital base so as to maintain investor and creditor confidence and to sustain future development of the business. The capital structure of the Company consists of equity, comprising share capital, net of accumulated deficit. There were no changes in the Company's approach to capital management during the period. The Company is not subject to any externally imposed capital requirements. 1.15 Other MD&A Requirements Additional information relating to the Company, including the Company's Annual Information Form, is available under the Company’s profile on SEDAR at www.sedar.com. Page 30 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 1.15.1 Disclosure of Outstanding Share Data The capital structure of the Company as of the date of this MD&A is shown in the following table: Exercise price Expiry date per share Number Number Common shares 94,974,174 Share purchase options October 27, 2011 $3.00 61,328 February 2, 2012 $5.00 365,668 February 4, 2012 $5.00 944,676 February 20, 2012 $10.95 150,000 March 26, 2012 $8.25 25,000 April 11, 2013 $9.74 75,000 May 27, 2013 $7.59 1,497,330 August 22, 2013 $5.35 40,000 October 27, 2013 $3.00 97,000 February 2, 2014 $5.00 1,823,000 March 15, 2014 $15.44 926,400 May 27, 2015 $7.59 951,000 March 15, 2016 $15.44 1,266,000 8,222,402 1.15.2 Internal Controls over Financial Reporting The Company's management is responsible for establishing and maintaining adequate internal controls over financial reporting. Any system of internal controls over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. There have been no significant changes in internal controls over financial reporting that occurred during the period ended June 30, 2011 that could have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting. 1.15.3 Disclosure Controls and Procedures The Company has disclosure controls and procedures in place to provide reasonable assurance that any information required to be disclosed by the Company under securities legislation is recorded, processed, summarized and reported within the applicable time periods and to ensure that required information is gathered and communicated to the Company's management so that decisions can be made about timely disclosure of that information. Page 31 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 1.15.4 Risk Factors The following are the principal risk factors and uncertainties which, in management's opinion, are likely to most directly affect the ultimate feasibility of the Pebble project. The Pebble Project’s mineral property interests do not contain any ore reserves or any known body of economic mineralization Although there are known bodies of mineralization on the Pebble Project, and the Pebble Partnership has completed core drilling programs within, and adjacent to, the deposits to determine measured and indicated resources, there are currently no known reserves or body of commercially viable ore and the Pebble Project must be considered an exploration prospect only. Extensive additional work is required before the Company or the Pebble Partnership can ascertain if any mineralization may be economic and hence constitute "ore". Engineering, socioeconomic and environmental studies are ongoing. Exploration for minerals is a speculative venture necessarily involving substantial risk. If the expenditures the Company and/or the Pebble Partnership incur and have incurred in the past on the Pebble Project do not result in discovery and development of commercial quantities of ore, the value of exploration and acquisition expenditures incurred will be totally lost. Feasibility work to determine the viability of the Pebble Project has not been completed and permits have not been applied for Final feasibility work has not been done to confirm the pit or underground mine design, mining methods, and processing methods. Final feasibility could determine that the currently assumed pit or other mine design, mining methods, and processing methods are incorrect. Construction and operation of the mine and processing facilities depends on securing environmental and other permits on a timely basis. No permits have been applied for and there can be no assurance that required permits can be secured or secured on a timely basis. Cost estimates used are based on costs at projects believed to be comparable, and not based on firm price quotes. Costs, including design, procurement, construction, and on-going operating costs and metal recoveries could be materially different from those currently assumed. There can be no assurance that mining can be conducted at assumed rates and grades. The project requires the development of port facilities, roads and electrical generating and transmission facilities. Although the Company believes that the State of Alaska favours the development of these facilities, there can be no assurance that these infrastructure facilities can be developed on a timely and cost-effective basis. Energy risks include the potential for significant increases in the cost of fuel and electricity. Volatility in Metal Prices The project has been evaluated using projected long-term price levels for copper, gold and molybdenum. Prices for these commodities are historically volatile, and neither the Company nor the Pebble Partnership has control of or influence on those prices, all of which are determined in international markets. The level of interest rates, the rate of inflation, the world supplies of and demands for copper, gold and molybdenum and the stability of exchange rates can all cause fluctuations in these prices. Such external economic factors are influenced by changes in international investment patterns and monetary systems and political developments. There can be no assurance that the prices of these commodities will continue at current levels or that they will not decline below the projected prices. The prices of copper, gold and molybdenum have fluctuated in recent years and they have shown an upward trend of late, future significant price declines could cause unfavorable changes in the economics of the project and may result in investors being unwilling to finance mineral projects, with the result that the Company may not be able to obtain sufficient financing to fund its exploration and, if warranted, development activities. Page 32 -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2011 Compliance with environmental requirements will command large resources and changes to these requirements could significantly increase the costs developing the Pebble Project and could delay these activities. The Pebble Partnership and the Company must comply with stringent environmental legislation in carrying out work on the Pebble Project. Environmental legislation is evolving in a manner that will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. Changes in environmental legislation could increase the cost to the Pebble Partnership of carrying out its exploration and, if warranted, development of the Pebble Project. Further, compliance with new or additional environmental legislation may result in delays to the exploration and, if warranted, development activities. Changes in government regulations and the presence of unknown environmental hazards may result in significant unanticipated compliance and reclamation costs Government regulations relating to mineral rights tenure, permission to disturb areas and the right to operate can adversely affect the Company. Northern Dynasty and the Pebble Partnership may not be able to obtain all necessary licenses and permits that may be required to carry out exploration at their project. Obtaining the necessary governmental permits is a complex, time-consuming and costly process. The duration and success of efforts to obtain permits are contingent upon many variables not within the Company’s or the Pebble Partnership’s control. Obtaining environmental permits may increase costs and cause delays depending on the nature of the activity to be permitted and the interpretation of applicable requirements implemented by the permitting authority. There can be no assurance that all necessary approvals and permits will be obtained and, if obtained, that the costs involved will not exceed those that we previously estimated. It is possible that the costs and delays associated with the compliance with such standards and regulations could become such that we would not proceed with the development or operation. General Mining Risks Mining is an inherently risky business with large capital expenditures and cyclical metals markets. Although the Company and the Pebble Partnership maintain high environmental standards for their project, like most major mining projects, there are almost always public concerns about new mining projects. The opponents of the Pebble Project are well organized and are trying to bring public and political pressure against the Pebble Project. If successful, the opponents could delay or prevent the commercialization of the Pebble Project even if it is found to be economically viable and technically and legally permittable. The Company and Pebble Partnership also compete with many companies possessing far greater financial resources and technical facilities for the acquisition of mineral concessions, claims, leases and other mineral interests, as well as for the recruitment and retention of qualified employees. The Pebble Project will require major financing, probably a combination of debt and equity financing. There can be no assurance that debt and/or equity financing will be available on acceptable terms. A significant increase in costs of capital could materially and adversely affect the value and feasibility of constructing the project. Page 33 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. Form 52-109F2 Certification of Interim Filings - Full Certificate I, Ronald W. Thiessen, President and Chief Executive Officer of Northern Dynasty Minerals Ltd., certify the following: 1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Northern Dynasty Minerals Ltd. (the “issuer”) for the interim period ended June 30, 2011. 2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. 3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. 4. Responsibility: The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. 5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer and I have, as at the end of the period covered by the interim filings (a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that (i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and (ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and (b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. 5.1 Control framework: The control framework the issuer’s other certifying officer and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework published by The Committee of Sponsoring Organizations of the Treadway Commission. 5.2 ICFR – material weakness relating to design: N/A 5.3 Limitation on scope of design: N/A -------------------------------------------------------------------------------- 6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2011 and ended on June 30, 2011 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. Date: August 15, 2011 /s/ R.W. Thiessen _______________________ Ronald W. Thiessen President and Chief Executive Officer 2 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- NORTHERN DYNASTY MINERALS LTD. Form 52-109F2 Certification of Interim Filings - Full Certificate I, Marchand Snyman, Chief Financial Officer of Northern Dynasty Minerals Ltd., certify the following: 1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Northern Dynasty Minerals Ltd. (the “issuer”) for the interim period ended June 30, 2011. 2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. 3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. 4. Responsibility: The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. 5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer and I have, as at the end of the period covered by the interim filings (a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that (i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and (ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and (b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. 5.1 Control framework: The control framework the issuer’s other certifying officer and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework published by The Committee of Sponsoring Organizations of the Treadway Commission. 5.2 ICFR – material weakness relating to design: N/A 5.3 Limitation on scope of design: N/A -------------------------------------------------------------------------------- 6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2011 and ended on June 30, 2011 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. Date: August 15, 2011 /s/ M. Snyman _______________________ Marchand Snyman Chief Financial Officer 2 --------------------------------------------------------------------------------