---



CONSOLIDATEDFINANCIALSTATEMENTS

YEARS ENDED DECEMBER 31, 2011
AND 2010

(ExpressedinthousandsofCanadianDollars)

---

Report of Independent Registered Chartered
  Accountants

To the Board of Directors and Shareholders of Northern Dynasty
  Minerals Ltd.

We have audited the accompanying consolidated financial
  statements of Northern Dynasty Minerals Ltd. and subsidiaries (the Company),
  which comprise the consolidated statements of financial position as at December
  31, 2011 and December 31, 2010, and the consolidated statements of comprehensive
  loss, cash flows, and changes in equity for the years then ended, and a summary
  of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial
  Statements

Management is responsible for the preparation and fair
  presentation of these consolidated financial statements in accordance with
  International Financial Reporting Standards as issued by the International
  Accounting Standards Board, and for such internal control as management
  determines is necessary to enable the preparation of consolidated financial
  statements that are free from material misstatement, whether due to fraud or
  error.

Auditor's Responsibility

Our responsibility is to express an opinion on these
  consolidated financial statements based on our audits. We conducted our audits
  in accordance with Canadian generally accepted auditing standards and the
  standards of the Public Company Accounting Oversight Board (United States).
  Those standards require that we comply with ethical requirements and plan and
  perform the audit to obtain reasonable assurance about whether the consolidated
  financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit
  evidence about the amounts and disclosures in the consolidated financial
  statements. The procedures selected depend on the auditor's judgment, including
  the assessment of the risks of material misstatement of the consolidated
  financial statements, whether due to fraud or error. In making those risk
  assessments, the auditor considers internal control relevant to the entity's
  preparation and fair presentation of the consolidated financial statements in
  order to design audit procedures that are appropriate in the circumstances. An
  audit also includes evaluating the appropriateness of accounting policies used
  and the reasonableness of accounting estimates made by management, as well as
  evaluating the overall presentation of the consolidated financial
  statements.

We believe that the audit evidence we have obtained in our
  audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present
  fairly, in all material respects, the financial position of Northern Dynasty
  Minerals Ltd. and subsidiaries as at December 31, 2011 and December 31, 2010,
  and their financial performance and cash flows for the years then ended in
  accordance with International Financial Reporting Standards as issued by the
  International Accounting Standards Board.

Other Matter

We have also audited, in accordance with the standards of the
  Public Company Accounting Oversight Board (United States), the Companys
  internal control over financial reporting as of December 31, 2011, based on the
  criteria established in Internal Control  Integrated Frameworkissued by
  the Committee of Sponsoring Organizations of the Treadway Commission and our
  report dated March 28, 2012 expressed an unqualified opinion on the Companys
  internal control over financial reporting.

(Signed) Deloitte & Touche LLP

Independent Registered Chartered Accountants
  March 28,
  2012
  Vancouver, Canada

---

Report of Independent Registered Chartered
  Accountants

To the Board of Directors and Shareholders of Northern Dynasty
  Minerals Ltd.

We have audited the internal control over financial reporting
  of Northern Dynasty Minerals Ltd. and subsidiaries (the Company) as of
  December 31, 2011, based on the criteria established in Internal
    ControlIntegrated Frameworkissued by the Committee of Sponsoring
  Organizations of the Treadway Commission. The Company's management is
  responsible for maintaining effective internal control over financial reporting
  and for its assessment of the effectiveness of internal control over financial
  reporting, included in the accompanying Managements Report on Internal Control
  over Financial. Our responsibility is to express an opinion on the Company's
  internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the
  Public Company Accounting Oversight Board (United States). Those standards
  require that we plan and perform the audit to obtain reasonable assurance about
  whether effective internal control over financial reporting was maintained in
  all material respects. Our audit included obtaining an understanding of internal
  control over financial reporting, assessing the risk that a material weakness
  exists, testing and evaluating the design and operating effectiveness of
  internal control based on the assessed risk, and performing such other
  procedures as we considered necessary in the circumstances. We believe that our
  audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a
  process designed by, or under the supervision of, the company's principal
  executive and principal financial officers, or persons performing similar
  functions, and effected by the company's board of directors, management, and
  other personnel to provide reasonable assurance regarding the reliability of
  financial reporting and the preparation of financial statements for external
  purposes in accordance with generally accepted accounting principles. A
  company's internal control over financial reporting includes those policies and
  procedures that (1) pertain to the maintenance of records that, in reasonable
  detail, accurately and fairly reflect the transactions and dispositions of the
  assets of the company; (2) provide reasonable assurance that transactions are
  recorded as necessary to permit preparation of financial statements in
  accordance with generally accepted accounting principles, and that receipts and
  expenditures of the company are being made only in accordance with
  authorizations of management and directors of the company; and (3) provide
  reasonable assurance regarding prevention or timely detection of unauthorized
  acquisition, use, or disposition of the company's assets that could have a
  material effect on the financial statements.

Because of the inherent limitations of internal control over
  financial reporting, including the possibility of collusion or improper
  management override of controls, material misstatements due to error or fraud
  may not be prevented or detected on a timely basis. Also, projections of any
  evaluation of the effectiveness of the internal control over financial reporting
  to future periods are subject to the risk that the controls may become
  inadequate because of changes in conditions, or that the degree of compliance
  with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material
  respects, effective internal control over financial reporting as of December 31,
  2011, based on the criteria established in Internal Control  Integrated
    Frameworkissued by the Committee of Sponsoring Organizations of the
  Treadway Commission.

We have also audited, in accordance with Canadian generally
  accepted auditing standards and the standards of the Public Company Accounting
  Oversight Board (United States), the consolidated financial statements as of and
  for the year ended December 31, 2011 of the Company and our report dated March
  28, 2012 expressed an unqualified opinion on those consolidated financial
  statements.

(Signed) Deloitte & Touche LLP

Independent Registered Chartered Accountants
  March 28,
  2012
  Vancouver, Canada

---

|Northern Dynasty Minerals Ltd.               
|---------------------------------------------
|Consolidated Statements of Financial Position
|(Expressed in thousands of Canadian Dollars) 

|                                               |  |       |  |   | As at       |  
|---------------------------------------------- |  | ----- |  | - | ----------- | -
|                                               |  |       |  |   | December 31 |  
|                                               |  | Notes |  |   | 2011        |  
|                                               |  |       |  |   |             |  
|ASSETS                                         |  |       |  |   |             |  
|                                               |  |       |  |   |             |  
|Non-current assets                             |  |       |  |   |             |  
|Investment in the Pebble Limited Partnership   |  | 3     |  | $ | 101,542     |  
|Exploration and evaluation
      assets        |  | 4     |  |   | 1,055       |  
|                                               |  |       |  |   | 102,597     |  
|                                               |  |       |  |   |             |  
|Current assets                                 |  |       |  |   |             |  
|Balances receivable from a
      related party |  | 8     |  |   | 483         |  
|Amounts receivable and other assets            |  | 5     |  |   | 4,704       |  
|Marketable securities                          |  |       |  |   |            |  
|Cash and cash equivalents                      |  | 6     |  |   | 37,457      |  
|                                               |  |       |  |   | 42,644      |  
|                                               |  |       |  |   |             |  
|                                               |  |       |  |   |             |  
|                                               |  |       |  |   |             |  
|Total Assets                                   |  |       |  | $ | 145,241     |  
|                                               |  |       |  |   |             |  
|EQUITY                                         |  |       |  |   |             |  
|                                               |  |       |  |   |             |  
|Share capital                                  |  | 7     |  | $ | 388,987     |  
|Reserves                                       |  |       |  |   | 48,132      |  
|Deficit                                        |  |       |  |   | (295,763    | )
|                                               |  |       |  |   | 141,356     |  
|LIABILITIES                                    |  |       |  |   |             |  
|                                               |  |       |  |   |             |  
|Non-current
      liabilities                  |  |       |  |   |             |  
|Deferred income taxes                          |  | 12    |  |   | 3,715       |  
|                                               |  |       |  |   | 3,715       |  
|                                               |  |       |  |   |             |  
|Current liabilities                            |  |       |  |   |             |  
|Balances payable to a related party            |  | 8     |  |   |            |  
|Amounts payable and other
      liabilities    |  | 9     |  |   | 170         |  
|                                               |  |       |  |   | 170         |  
|                                               |  |       |  |   |             |  
|Total
      Liabilities                        |  |       |  |   | 3,885       |  
|                                               |  |       |  |   |             |  
|                                               |  |       |  |   |             |  
|                                               |  |       |  |   |             |  
|Total Equity
      and Liabilities             |  |       |  | $ | 145,241     |  

Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.

These consolidated financial statements are authorized for
issue by the Board of Directors on March 28, 2012. 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

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|Northern Dynasty Minerals Ltd.                                                  
|--------------------------------------------------------------------------------
|Consolidated Statements of Comprehensive Loss                                   
|(Expressed in thousands of Canadian Dollars, except for
      share information)

|                                                                                                 |  |       |  |   | Year ended December 31 |  
|------------------------------------------------------------------------------------------------ |  | ----- |  | - | ---------------------- | -
|                                                                                                 |  | Notes |  |   | 2011                   |  
|                                                                                                 |  |       |  |   |                        |  
|Expenses                                                                                         |  |       |  |   |                        |  
|Exploration and evaluation                                                                       |  |       |  |   | 819                    |  
|General and administrative                                                                       |  |       |  |   | 6,110                  |  
|Share-based compensation                                                                         |  |       |  |   | 14,205                 |  
|Loss from operating activities                                                                   |  |       |  |   | 21,134                 |  
|Interest income                                                                                  |  |       |  |   | (944                   | )
|Loss before tax                                                                                  |  |       |  |   | 20,190                 |  
|Income tax (recovery) expense                                                                    |  | 12    |  |   | (51                    | )
|Loss for the year                                                                                |  |       |  | $ | 20,139                 |  
|                                                                                                 |  |       |  |   |                        |  
|Other comprehensive loss (income)                                                                |  |       |  |   |                        |  
|Unrealized loss on available-for-sale
      marketable securities                                |  |       |  |   | 1                      |  
|Exchange difference arising on
      translation of investment in the Pebble Limited Partnership |  | 3     |  |   | (2,236                 | )
|Deferred income tax on investment                                                                |  | 7(c)  |  |   | 82                     |  
|Other comprehensive (income) loss                                                                |  |       |  | $ | (2,153                 | )
|                                                                                                 |  |       |  |   |                        |  
|Total comprehensive loss                                                                         |  |       |  | $ | 17,986                 |  
|                                                                                                 |  |       |  |   |                        |  
|Basic and diluted loss per common share                                                          |  | 10    |  | $ | 0.21                   |  

Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.

Page 3

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|Northern Dynasty Minerals Ltd.              
|--------------------------------------------
|Consolidated Statements of Cash Flows       
|(Expressed in thousands of Canadian Dollars)

|                                                                   |  |       |       | Year ended December 31 |  
|------------------------------------------------------------------ |  | ----- | ----- | ---------------------- | -
|                                                                   |  | Notes |       | 2011                   |  
|                                                                   |  |       |       |                        |  
|Cash flows from operating activities                               |  |       |       |                        |  
|Loss for the year                                                  |  |       | $     | (20,139                | )
|Adjustments for items not
      affecting cash:                    |  |       |       |                        |  
|Donation of shares                                                 |  | 7(a)  |       | 866                    |  
|Foreign exchange
      (gain) loss                                 |  |       |       | (65                    | )
|Income tax recovery                                                |  | 12    |       |                       |  
|Interest income                                                    |  |       |       | (944                   | )
|Share-based compensation                                           |  |       |       | 14,205                 |  
|                                                                   |  |       |       | (6,077                 | )
|Changes in non-cash working capital items                          |  |       |       |                        |  
|(Increase) in
      amounts receivable and other assets            |  |       |       | (616                   | )
|(Increase) in balances
      receivable from related parties       |  |       |       | (408                   | )
|(Decrease)
      increase in amounts payable and other liabilities |  |       |       | (282                   | )
|(Decrease) increase in balances
      payable to related parties   |  |       |       | (102                   | )
|                                                                   |  |       |       | (1,408                 | )
|                                                                   |  |       |       |                        |  
|Net cash used in operating activities                              |  |       |       | (7,485                 | )
|                                                                   |  |       |       |                        |  
|Cash flows from investing activities                               |  |       |       |                        |  
|Interest received                                                  |  |       |       | 610                    |  
|Loan advanced                                                      |  | 5(a)  |       | (265                   | )
|Exploration and evaluation assets                                  |  | 4     |       |                       |  
|Net cash from (used in) investing activities                       |  |       |       | 345                    |  
|                                                                   |  |       |       |                        |  
|Cash flows from financing activity                                 |  |       |       |                        |  
|Common
      shares issued for cash, net of issue costs            |  |       |       | 4,211                  |  
|Net cash from financing activity                                   |  |       |       | 4,211                  |  
|                                                                   |  |       |       |                        |  
|Net decrease in cash and cash
      equivalents                    |  |       |       | (2,929                 | )
|Effect of exchange rate fluctuations on cash
      held            |  |       |       | (16                    | )
|Cash and cash equivalents at beginning of the
      year           |  |       |       | 40,402                 |  
|                                                                   |  |       |       |                        |  
|Cash and cash equivalents at end of the year                       |  |       | **$** | **37,457**             |  

Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.

Page 4

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|Northern Dynasty Minerals Ltd.                                                  
|--------------------------------------------------------------------------------
|Consolidated Statements of Changes in Equity                                    
|(Expressed in thousands of Canadian Dollars, except for
      share information)

|                                                                         |  | Share capital |  |   | Reserves |  |   |             |   |   |                 |  
|------------------------------------------------------------------------ |  | ------------- |  | - | -------- |  | - | ----------- | - | - | --------------- | -
|                                                                         |  |               |  |   |          |  |   | Equity      |   |   | Foreign         |  
|                                                                         |  |               |  |   |          |  |   | settled     |   |   | currency        |  
|                                                                         |  |               |  |   |          |  |   | share-based |   |   | translation     |  
|                                                                         |  | Number of     |  |   |          |  |   | payments    |   |   | reserve         |  
|                                                                         |  | shares        |  |   | Amount   |  |   | reserve     |   |   | (note
    7(c)) |  
|                                                                         |  |               |  |   |          |  |   |             |   |   |                 |  
|Balance at January 1, 2010                                               |  | 93,173,976    |  | $ | 370,660  |  | $ | 31,176      |   | $ | 5,743           |  
|Shares issued for cash on exercise of share purchase
      options       |  | 1,003,090     |  |   | 5,160    |  |   |            |   |   |                |  
|Fair value of share options allocated to
      shares issued on exercise |  |              |  |   | 4,750    |  |   | (4,750      | ) |   |                |  
|Share-based compensation                                                 |  |              |  |   |         |  |   | 8,373       |   |   |                |  
|Loss for the year                                                        |  |              |  |   |         |  |   |            |   |   |                |  
|Other
      comprehensive loss for the year net of tax                   |  |              |  |   |         |  |   |            |   |   | (5,427          | )
|Balance at December 31, 2010                                             |  | 94,177,066    |  | $ | 380,570  |  | $ | 34,799      |   | $ | 316             |  
|                                                                         |  |               |  |   |          |  |   |             |   |   |                 |  
|Shares issued for cash on exercise of share
      purchase options       |  | 726,698       |  |   | 4,211    |  |   |            |   |   |                |  
|Fair value of share options allocated to shares issued on
      exercise |  |              |  |   | 3,340    |  |   | (3,340      | ) |   |                |  
|Shares donated (note 7(a))                                               |  | 75,000        |  |   | 866      |  |   |            |   |   |                |  
|Share-based compensation                                                 |  |              |  |   |         |  |   | 14,205      |   |   |                |  
|Loss for the year                                                        |  |              |  |   |         |  |   |            |   |   |                |  
|Other
      comprehensive income (loss) for the year net of tax          |  |              |  |   |         |  |   |            |   |   | 2,154           |  
|Balance at December 31, 2011                                             |  | 94,978,764    |  | $ | 388,987  |  | $ | 45,664      |   | $ | 2,470           |  

Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.

Page 5

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(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 15thFloor,
  1040 West Georgia Street, Vancouver, British Columbia. The consolidated
  financial statements ("Financial Statements") of the Company as at and for the
  year ended December 31, 2011, include financial information for the Company and
  its subsidiaries (note 2(c)) (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 Financial Statements have been prepared in
      accordance with International Financial Reporting Standard ("IFRS") as
      issued by the International Accounting Standards Board ("IASB") and
      interpretations issued by the IFRS Interpretations Committee (IFRICs).
      These Financial Statements have been prepared on the basis of IFRS
      standards that are effective or available for early adoption for the
      Groups reporting year ended December 31, 2011.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(b) | Basis of Preparation                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | These Financial Statements have been prepared on a
      historical cost basis, except for financial instruments classified as
      available-for-sale which are stated at their fair value. In addition these
      Financial Statements have been prepared using the accrual basis of
      accounting, except for cash flow information.                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The accounting policies set out below have been applied
      consistently to all periods presented in these Financial Statements.                                                                                                                                                                                                                                                                                                                                                            

Page 6

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|(c) | Basis of Consolidation                                                                                                              
|--- | ------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                     
|    | These Financial Statements incorporate the financial
      statements of the Company and all of its subsidiaries listed
      below:

ProportionofOwnershipName of Subsidiary
      Place
        of Incorporation
      Interest
      Principal Activity3537137 Canada Inc.
      Canada
      100%
      Holding Group0796412 BC Ltd.
      British Columbia, Canada
      100%
      Not activeNorthern Dynasty Partnership1
      Alaska, USA
      100%
      Holding GroupU5 Resources
        Inc.2
      Nevada, USA
      100%
      Holding Company


| | 1 | Holds the Groups 50% interest in Pebble Mines Corp. and
      the Pebble Partnership (note 3).
| | - | -----------------------------------------------------------------------------------------------
| | 2 | Holds the claims purchased from Liberty Star (note
      4).                                   

The Group has determined that its
  investment in the Pebble Partnership, a 50:50 limited partnership between the
  Group and Anglo American plc ("Anglo American"), qualifies as an interest in a
  jointly controlled entity under IAS 31, Interests in Joint Ventures. The
  Group elected and applies the equity method to account for its interest in the
  Pebble Partnership (note 3). The investment is carried in the statement of
  financial position at cost and adjusted by post-acquisition changes in the
  Groups share of the net assets of the joint venture, less any impairment
  losses. As the Groups investment is carried in US dollars, the investment is
  translated at the end of each reporting period (note 3).

Intra-Group balances and transactions,
  including any unrealized income and expenses arising from intra-Group
  transactions, are eliminated in full on consolidation. Unrealized gains arising
  from transactions with equity accounted investees are eliminated against the
  investment to the extent of the Groups interest in the investee. Unrealized
  losses are eliminated in the same way as unrealized gains, but only to the
  extent that there is no evidence of impairment.

|(d) | Business Combinations                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Acquisitions of businesses are accounted for using the
      acquisition method. The cost of the business combination is measured as
      the aggregate of the acquisition-date fair values of assets transferred,
      liabilities incurred or assumed, and equity instruments issued by the
      Group in exchange for control of the acquiree. Acquisition-related costs
      are recognized in profit or loss as incurred.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | At the acquisition date the identifiable assets acquired
      and the liabilities assumed and any contingent liabilities are recognized
      at their fair values at the acquisition date, except for:                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   

Page 7

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

| |  |                                                                                                                                                                                                                                                                    
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | liabilities or equity instruments related to
      share-based payment arrangements of the acquiree or the replacement by the
      Group of an acquirees share-based payment arrangements, which are measured in
    accordance with IFRS 2, Share-based Payment.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Goodwill arising on acquisition is recognized as an asset
      and initially measured at cost, being the excess of the cost of the
      business combination over the Groups interest in the net fair value of
      the identifiable assets, liabilities and contingent liabilities
      recognized. If, after reassessment, the Groups interest in the net fair
      value of the acquirees identifiable assets, liabilities and contingent
      liabilities exceeds the cost of the business combination, the excess is
      recognized immediately in profit or loss. If the initial accounting for a
      business combination is incomplete by the end of the reporting period in
      which the combination occurs, the Group reports provisional amounts for
      the items for which the accounting is incomplete. Those provisional
      amounts are adjusted during the measurement period discussed further
      below), or additional assets or liabilities are recognized, to reflect new
      information obtained about facts and circumstances that existed as of the
      acquisition date that, if known, would have affected the amounts
      recognized as of that date.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The measurement period is the period from the date of
      acquisition to the date the Group obtains complete information about facts
      and circumstances that existed as of the acquisition date  and is subject
      to a maximum of one year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The interest of non-controlling shareholders in the
      acquiree is initially measured at the non- controlling shareholders
      proportion of the net fair value of the assets, liabilities and contingent
      liabilities recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(e) | Interests in Joint Ventures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | A joint venture is a contractual arrangement whereby the
      Group and other parties undertake an economic activity that is subject to
      joint control (i.e. when the strategic financial and operating policy
      decisions relating to the activities of the joint venture require the
      unanimous consent of the parties sharing control).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Joint venture arrangements that involve the establishment
      of a separate entity in which each venturer has an interest are referred
      to as jointly controlled entities. The Group reports its interests in a
      jointly controlled entity ("JCE"), under the equity method of accounting,
      except when the investment is classified as held for sale, in which case
      it is accounted for in accordance with IFRS 5, Non-current Assets Held
        for Sale and Discontinued Operations. Under the equity method, the
      Groups interest in the JCE is carried in the consolidated financial
      statement of financial position at cost as adjusted for post- acquisition
      changes in the Groups share of the net assets of the JCE less any
      impairment in the value of the investment. Losses in excess of the Groups
      interest in that JCE are recognized only to the extent that the Group has
      incurred legal or constructive obligations or made payments on behalf of
      the JCE.                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Any excess of the cost of the acquisition over the
      Groups share of the fair value of the identifiable assets, liabilities
      and contingent liabilities of the JCE recognized at the date of the
      acquisition is recognized as goodwill. The goodwill is included within the
      carrying amount of the JCE and is assessed for impairment as part of that
      JCE. Any excess of the Groups share of the net fair value of
      the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Page 8

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

identifiable assets, liabilities and
  contingent liabilities over the cost of acquisition, after reassessment, is
  recognized immediately in profit or loss.

When a group entity transacts with a
  JCE of the Group, unrealized profits and losses are eliminated to the extent of
  the Groups interest in the joint venture. The Groups interests in JCEs are as
  follow:

Proportion ofPlace of
      OwnershipName of JCE
      Incorporation
      Interest
      Principal ActivityPebble Mines Corp.
      Delaware, USA
      50%
      General partnerPebble Limited
        Partnership
      Alaska, USA
      50%
      Exploration of Pebble Project


|(f) | Foreign Currencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The functional currency is the currency of the primary
      economic environment in which the entity operates and has been determined
      for each entity within the Group. The functional currency of the Pebble
      Partnership and Pebble Mines Corp. is US dollars and for all other
      entities within the Group, the functional currency is Canadian dollars.
      The functional currency determinations were conducted through an analysis
      of the consideration factors identified in IAS 21, The Effects of
        Changes in Foreign Exchange Rates.                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Transactions in currencies other than the functional
      currency are recorded at the rates of exchange prevailing on dates of
      transactions. At the end of each reporting period, monetary assets and
      liabilities that are denominated in foreign currencies are translated at
      the rates prevailing at that date. Non-monetary assets and liabilities
      carried at fair value that are denominated in foreign currencies are
      translated at rates prevailing at the date when the fair value was
      determined. Non-monetary items that are measured in terms of historical
      cost in a foreign currency are not retranslated.              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(g) | Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Non-derivative financial assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Group 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 Group manages such investments and makes purchase and sale
      decisions based on their fair value in accordance with the Group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.

Page 9

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

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, are recognized in other comprehensive income or loss and
  accumulated in the investment revaluation reserve within equity. 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 within other comprehensive
  income or loss. The change in fair value of AFS equity investments is recognized
  in other comprehensive income or loss.

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 loan receivable from Liberty Star (note 5(a)), balances
  receivable from a related party and cash and cash equivalents (see below).

Cash and equivalents

Cash and cash equivalents in the
  statement of financial position comprise cash and investments held at major
  financial institutions that are readily convertible into a known amount of cash
  and which are only subject to an insignificant risk of change in value, and are
  measured at amortized cost.

The Groups cash and cash equivalents
  are invested in business and savings accounts and guaranteed investment
  certificates which are available on demand by the Group for its programs.

Non-derivative financial
  liabilities:

The Groups non-derivative financial
  liabilities comprise amounts payable which are only trade payables (note 9) and
  balances payable to a related party.

All financial liabilities fall within
  the classification of other financial liabilities versus financial liabilities
  through profit and loss and 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.

Page 10

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

Impairment of financial
  assets:

When an AFS financial asset is
  considered to be impaired, cumulative gains or losses previously recognized in
  other comprehensive income or loss are reclassified to profit or loss in the
  period. Financial assets are assessed for indicators of impairment at the end of
  each reporting period. Financial assets are impaired when there is objective
  evidence that, as a result of one or more events that occurred after the initial
  recognition of the financial assets, the estimated future cash flows of the
  investments have been impacted. For marketable securities classified as AFS, a
  significant or prolonged decline in the fair value of the securities below their
  cost is considered to be objective evidence of impairment.

For all other financial assets
  objective evidence of impairment could include:

- significant financial difficulty of the issuer or
      counterparty; or
- default or delinquency in interest or principal
      payments; or
- it becoming probable that the borrower will enter
      bankruptcy or financial re-organization.

For certain categories of financial
  assets, such as amounts receivable, assets that are assessed not to be impaired
  individually are subsequently assessed for impairment on a collective basis. The
  carrying amount of financial assets is reduced by the impairment loss directly
  for all financial assets with the exception of amounts receivable, where the
  carrying amount is reduced through the use of an allowance account. When an
  amount receivable is considered uncollectible, it is written off against the
  allowance account. Subsequent recoveries of amounts previously written off are
  credited against the allowance account. Changes in the carrying amount of the
  allowance account are recognized in profit or loss.

With the exception of AFS equity
  instruments, if, in a subsequent period, the amount of the impairment loss
  decreases and the decrease can be related objectively to an event occurring
  after the impairment was recognized, the previously recognized impairment loss
  is reversed through profit or loss to the extent that the carrying amount of the
  investment at the date the impairment is reversed does not exceed what the
  amortized cost would have been had the impairment not been recognized. In
  respect of AFS equity securities, impairment losses previously recognized
  through profit or loss are not reversed through profit or loss. Any increase in
  fair value subsequent to an impairment loss is recognized directly in equity.

When an AFS financial asset is
  considered to be impaired, cumulative gains or losses previously recognized in
  other comprehensive income are reclassified to profit or loss in the period.

Derivative financial assets:

The loan receivable from Liberty Star
  (note 5(a)) 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
  December 31, 2011, is of nominal value as the earn-in and joint venture

Page 11

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|    | agreement ("JV Agreement") has not been concluded by the
      parties and the first US$1 million has still to be incurred by the Group
      in respect to the JV Agreement claims (note 5(a)).                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(h) | Exploration and Evaluation Expenditure                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Exploration and evaluation expenditures include the costs
      of acquiring licenses, costs associated with exploration and evaluation
      activity, and the acquisition date fair value of exploration and
      evaluation assets acquired in a business combination or an asset
      acquisition. Exploration and evaluation expenditures are expensed as
      incurred except for expenditures associated with the acquisition of
      exploration and evaluation assets through a business combination or an
      asset acquisition. Costs incurred before the Group has obtained the legal
      rights to explore an area are expensed.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Acquisition costs, including general and administrative
      costs, are only capitalized to the extent that these costs can be related
      directly to operational activities in the relevant area of interest where
      it is considered likely to be recoverable by future exploitation or sale
      or where the activities have not reached a stage which permits a
      reasonable assessment of the existence of reserves.                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Exploration and evaluation ("E&E") assets are
      assessed for impairment only when facts and circumstances suggest that the
      carrying amount of an E&E asset may exceed its recoverable amount and
      when the Group has sufficient information to reach a conclusion about
      technical feasibility and commercial viability.                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Industry-specific indicators for an impairment review
      arise typically when one of the following circumstances
      applies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

- Substantive expenditure on further exploration and
      evaluation activities is neither budgeted nor planned;
- title to the asset is compromised;
- adverse changes in the taxation and regulatory
      environment;
- adverse changes in variations in commodity prices
      and markets; and
- variations in the exchange rate for the currency of
      operation.

|    | Once the technical feasibility and commercial viability
      of the extraction of mineral resources in an area of interest are
      demonstrable, exploration and evaluation assets attributable to that area
      of interest are first tested for impairment and then reclassified to
      mining property and development assets within property, plant and
      equipment.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                    
|    | Recoverability of the carrying amount of any exploration
      and evaluation assets is dependent on successful development and
      commercial exploitation, or alternatively, sale of the respective areas of
      interest.                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                    
|(i) | Property, Plant and Equipment                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                    
|    | Property, plant and equipment ("PPE") are carried at
      cost, less accumulated depreciation and accumulated impairment
      losses.                                                                                                                                                                                                                                            

Page 12

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|    | The cost of an item of PPE consists of the purchase
      price, any costs directly attributable to bringing the asset to the
      location and condition necessary for its intended use and an initial
      estimate of the costs of dismantling and removing the item and restoring
      the site on which it is located.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Depreciation is provided at rates calculated to write off
      the cost of PPE, less their estimated residual value, using the declining
      balance method at various rates ranging from 20% - 30% per
      annum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | An item of PPE is derecognized upon disposal or when no
      future economic benefits are expected to arise from the continued use of
      the asset. Any gain or loss arising on disposal of the asset, determined
      as the difference between the net disposal proceeds and the carrying
      amount of the asset, is recognized in profit or loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Where an item of plant and equipment consists of major
      components with different useful lives, the components are accounted for
      as separate items of plant and equipment. Expenditures incurred to replace
      a component of an item of PPE that is accounted for separately, including
      major inspection and overhaul expenditures, are capitalized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Residual values and estimated useful lives are reviewed
      at least annually.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(j) | Impairment of Non-Financial Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | At the end of each reporting period the carrying amounts
      of the Group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. Where it is not possible to estimate the
      recoverable amount of an individual asset, the Group estimates the
      recoverable amount of the cash-generating unit to which the asset belongs.
      The recoverable amount is the higher of fair value less costs to sell and
      value in use. Fair value is determined as the amount that would be
      obtained from the sale of the asset in an arms length transaction between
      knowledgeable and willing parties. 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 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.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Where an impairment loss subsequently reverses, the
      carrying amount of the asset (or cash- generating unit) is increased to
      the revised estimate of its recoverable amount, but the increased carrying
      amount may not exceed the carrying amount that would have been determined
      had no impairment loss been recognized for the asset (or cash-generating
      unit) in prior years. A reversal of an impairment loss is recognized
      immediately in profit or loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Group has not recorded any impairment charges in the
      years presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Page 13

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|(k) | Share Capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Common shares are classified as equity. Transaction costs
      directly attributable to the issue of common shares and share purchase
      options are recognized as a deduction from equity, net of any tax
      effects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(l) | Share-based Payment Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The share purchase option plan allows Group employees and
      consultants to acquire shares of the Group. The fair value of share
      purchase options granted is recognized as an employee or consultant
      expense with a corresponding increase in the equity settled share-based
        payments reservein equity. An individual is classified as an employee
      when the individual is an employee for legal or tax purposes ("direct
      employee") or provides services similar to those performed by a direct
      employee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The fair value is measured at grant date for each tranche
      which is expensed on a straight line basis over the vesting period with a
      corresponding increase in the equity settled share-based payments
        reservein equity. The fair value of the share purchase options
      granted is measured using the Black- Scholes option pricing model taking
      into account the terms and conditions upon which the share purchase
      options were granted and forfeiture rates as appropriate. At the end of
      each reporting period, the amount recognized as an expense is adjusted to
      reflect the actual number of share purchase options that are expected to
      vest.                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(m) | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Income tax on the profit or loss for the years presented
      comprises current and deferred tax. Income tax is recognized in profit or
      loss except to the extent that it relates to items recognized in other
      comprehensive income or loss or directly in equity, in which case it is
      recognized in other comprehensive income or loss or equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Current tax expense is the expected tax payable on the
      taxable income for the year, using tax rates enacted or substantively
      enacted at year end, adjusted for amendments to tax payable with regards
      to previous years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Deferred tax is provided using the balance sheet
      liability method, providing for unused tax loss carryforwards and
      temporary differences between the carrying amounts of assets and
      liabilities for financial reporting purposes and the amounts used for
      taxation purposes. The following temporary differences are not provided
      for: goodwill not deductible for tax purposes; the initial recognition of
      assets or liabilities that affect neither accounting nor taxable profit;
      and differences relating to investments in subsidiaries, associates, and
      joint ventures to the extent that they will probably not reverse in the
      foreseeable future. The amount of deferred tax provided is based on the
      expected manner of realization or settlement of the carrying amount of
      assets and liabilities, using tax rates enacted or substantively enacted
      at the end of the reporting period applicable to the period of expected
      realization or settlement.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | A deferred tax asset is recognized only to the extent
      that it is probable that future taxable profits will be available against
      which the asset can be utilized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Page 14

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|    | Additional income taxes that arise from the distribution
      of dividends are recognized at the same time as the liability to pay the
      related dividend.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Deferred tax assets and liabilities are offset when there
      is a legally enforceable right to set off current tax assets against
      current tax liabilities and when they relate to income taxes levied by the
      same taxation authority and the Group intends to settle its current tax
      assets and liabilities on a net basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(n) | 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 a pre-tax rate that reflects 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 Group have been, and may in the
      future be, affected from time to time in varying degree by changes in
      environmental regulations, including those for site restoration costs.
      Both the likelihood of new regulations and their overall effect upon the
      Group are not predictable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Group has no material restoration, rehabilitation and
      environmental obligations as the disturbance to date is
      immaterial.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(o) | Loss per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Group presents basic and diluted loss per share data
      for its common shares, calculated by dividing the loss attributable to
      common shareholders of the Group by the weighted average number of common
      shares outstanding during the period. Diluted loss per share does not
      adjust the loss attributable to common shareholders or the weighted
      average number of common shares outstanding when the effect is
      anti-dilutive.                                                                                                                                                                                                                                                                                                                                                   

Page 15

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|(p) | 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, is located in Alaska, USA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(q) | Significant Accounting Estimates and
      Judgments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The preparation of these 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 Financial
      Statements include estimates which, by their nature, are uncertain. The
      impacts of such estimates are pervasive throughout the 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.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | 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 year; and                                                                                                                                                
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ii. | the provision for the deferred income tax expense
      included in the loss for the year (nil for current year) and the
      composition of deferred income tax liabilities included in the
      consolidated statements of financial position.

Critical accounting
  judgments

The following judgements have been
  made:

| | i.   | the recoverability of amounts receivable which are
      included in the consolidated statements of financial position;                                                                             
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ii.  | the recoverability of the carrying value of the
      investment in the Pebble Partnership and the Groups E&E assets
      included in the consolidated 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.          

Page 16

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|(r) | New Accounting Standards, Interpretations and
      Amendments to Existing Standards
|--- | ------------------------------------------------------------------------------------
|    |                                                                                     
|    | (i)                                                                                 
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    | (ii)                                                                                
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    | (iii)                                                                               
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     
|    |                                                                                     

Page 17

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(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.

- New interpretation IFRIC 20, Stripping Costs in
      the Production Phase of a Surface Mine
      This Interpretation
      clarifies when production stripping should lead to the recognition of an asset
      and how that asset should be measured, both initially and in subsequent
      periods. Earlier application is permitted. This interpretation and the
      requirements for accounting for stripping costs will only be applicable to the
      Group once it is in the production phase.

| | (iv) | Effective for annual periods beginning on or after
      January 1, 2015
| | ---- | ------------------------------------------------------------------------

- New standard IFRS 9, Financial Instruments,
      Classification and Measurement
      The standard represents 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. Earlier application is permitted.

Page 18

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

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 that held its Pebble Property interest into a limited
      partnership, the Pebble Partnership. Anglo American plc ("Anglo American")
      through a wholly-owned subsidiary subscribed for 50% of the Pebble
      Partnership's equity effective July 31, 2007. The Group (through a
      wholly-owned subsidiary) and Anglo American 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.
      Anglo American is required, in order to retain its 50% interest in the
      Pebble Partnership, to commit within 90 days of the later of the receipt
      of the approved prefeasibility report and the approved study alternatives,
      to fund further expenditures which would bring its total investment to at
      least US$450 million, which amount is to be expended in producing a final
      feasibility study and in related activities, which is expected to take the
      Pebble Partnership to a production decision. The final feasibility study
      will require more than the cumulative US$450 million of expenditures. Upon
      an affirmative decision by the Pebble Partnership 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 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 December 31, 2011, Anglo American has funded US$398.5
      million ($418.1 million). The Pebble Partnership agreement provides for
      equal project control rights for both partners with no operators fees
      payable to either party.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | 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 year ended December 31, 2011, the Pebble
      Partnership has incurred losses totaling $84,517 (2010  $68,803).
      Cumulative losses since inception of the Pebble Partnership to December
      31, 2011 total $417,373 (2010  $332,856). 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Page 19

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

Investment in the
        Pebble Partnership
      
      As at
        December 31
      
      
      As at
        December 312011
      
      
      2010Carrying value at the beginning of the year
      $
      99,306
      
      $
      104,937Movement for yearForeign currency translation
        (note 7(c))
      
      2,236
      
      
      (5,631
      )Carrying value at
        the end of the year
      $
      101,542
      
      $
      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
        December 31
      
      
      As at
        December 312011
      
      
      2010Non-current assets
      $
      101,311
      
      $
      99,451Current assets
      
      14,095
      
      
      14,825Total assets
      $
      115,406
      
      $
      114,276Current liabilities
      
      10,522
      
      
      5,011Total
        liabilities
      $
      10,522
      
      $
      5,011


| | Losses                      |   | For the year ended December 31 | 
| | --------------------------- | - | ------------------------------ | 
| |                             |   | 2011                           | 
| | Net loss for the year       | $ | 84,517                         | 
| | Net cumulative
      losses |   | 417,373                        | 

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

|4. | EXPLORATION AND EVALUATION
      ASSETS
|-- | ---------------------------------------

| |                           |   | For the year ended December 31 | 
| | ------------------------- | - | ------------------------------ | 
| |                           |   | 2011                           | 
| | Cost at beginning of year | $ | 1,055                          | 
| | Additions                 |   |                               | 
| | Cost at end of year       | $ | 1,055                          | 

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 Page 20

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

consideration for a US$1 million
  (approximately $1.1 million) cash payment. In addition, a loan of US$3 million
  ($3.1 million) was provided by the Group to Liberty Star (note 5(a)). The Pebble
  Partnership had the right to acquire these claims from the Group but declined to
  exercise that right.

|5. | AMOUNTS RECEIVABLE AND OTHER
      ASSETS
|-- | -----------------------------------------

| |                            |   | As at
      December 31 |  |   | As at
      December 31 | 
| | -------------------------- | - | ----------------------- |  | - | ----------------------- | 
| |                            |   | 2011                    |  |   | 2010                    | 
| | Amounts receivable         | $ | 236                     |  | $ | 132                     | 
| | Loan receivable (a)        |   | 4,292                   |  |   | 3,136                   | 
| | Other assets  prepayments |   | 176                     |  |   | 140                     | 
| | Total                      | $ | 4,704                   |  | $ | 3,408                   | 

|(a) | Loan receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Group advanced to Liberty Star US$3 million ($3.1
      million) pursuant to a letter agreement dated June 29, 2010. During 2011,
      the principal amount of the loan was increased by US$729 ($740) pursuant
      to amendments to the letter agreement dated September 8, 2011 and November
      14, 2011, being the amounts expended by the Group in 2011 and 2010 on
      annual assessment work, rental and related fees relating to Liberty Stars
      claims in Alaska. Of this amount US$270 ($265) was incurred in 2011 and
      US$459 ($475) in 2010.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The following summarizes the movement in the loan
      receivable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                               |   | For year ended December 31 | 
| | ----------------------------- | - | -------------------------- | 
| |                               |   | 2011                       | 
| | Balance at beginning of year  | $ | 3,136                      | 
| | Additions                     |   |                            | 
| | Cash loan advanced            |   |                           | 
| | Expenses paid in current year |   | 265                        | 
| | Expenses paid in prior year   |   | 475                        | 
| | Interest                      |   | 334                        | 
| | Foreign exchange loss (gain)  |   | 82                         | 
| | Balance at end
      of year  | $ | 4,292                      | 

The loan receivable accrues interest at
  10% per annum compounded monthly and is secured by assets and mining claims
  owned by Liberty Star in Alaska, USA. The loan and accrued interest is repayable
  on demand and will be due within 45 days thereof, or convertible into Liberty
  Star shares, provided the Group has spent at least a minimum amount (the
  Minimum Expenditure) earning into a joint venture (which has still to be
  formed as of the date of these Financial Statements  see below). The Minimum
  Expenditure was originally set at US$1 million, but the Group and Liberty Star
  subsequently agreed on November 14, 2011 to reduce the Minimum Expenditure to
  US$272 as a result of the additions to the loan. The Group has still to complete
  this expenditure requirement.

Page 21

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

Subject to negotiating and signing a
  definitive earn-in option and joint venture agreement ("JV Agreement"), the
  Group can earn a 60% interest in certain Liberty Stars properties in Alaska by
  spending US$10 million in exploration and claim maintenance on those properties
  over six years. The initial loan advanced plus accrued interest may be applied
  as part of the earn-in requirements, at the Groups discretion. Should a JV
  Agreement be entered into, the loan plus accrued interest 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 the Minimum Expenditure;
      or
| | c. | Liberty Star terminates the JV Agreement due to a
      superior 3rdparty offer.                                                         

The loan is convertible at the option
  of the Group, 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 the Minimum
  Expenditure. 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
      December 31 |  |   | As at
      December 31 | 
| | ---------------------------------------- | - | ----------------------- |  | - | ----------------------- | 
| |                                          |   | 2011                    |  |   | 2010                    | 
| | Business and savings accounts            | $ | 28,055                  |  | $ | 31,207                  | 
| | Guaranteed
      Investment Certificates |   | 9,402                   |  |   | 9,195                   | 
| | Total                                    | $ | 37,457                  |  | $ | 40,402                  | 

|7.  | CAPITAL AND RESERVES                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|(a) | Authorized Share Capital                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | At December 31, 2011, the authorized share capital
      comprised an unlimited number of common shares. The common shares do not
      have a par value. All issued shares are fully paid.                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | In 2011, the Group issued and donated 75,000 common
      shares 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

Page 22

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

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.

The following summarizes the changes in
  the Groups outstanding share purchase options for the years ended December 31,
  2011 and 2010:

| |                                      |  | For year ended December 31, 2011 |   |  | For year ended December 31, 2010 |  
| | ------------------------------------ |  | -------------------------------- | - |  | -------------------------------- | -
| |                                      |  |                                  |   |  | Weighted                         |  
| |                                      |  | Number of                        |   |  | average                          |  
| |                                      |  | share                            |   |  | exercise                         |  
| |                                      |  | purchase                         |   |  | price                            |  
| | Continuity of
      share options    |  | options                          |   |  | ($/option)                       |  
| | Balance at beginning of year         |  | 6,795,110                        |   |  | 6.19                             |  
| | Granted                              |  | 2,323,400                        |   |  | 15.23                            |  
| | Exercised                            |  | (726,698                         | ) |  | 5.79                             |  
| | Expired                              |  | (10,000                          | ) |  | (9.74                            | )
| | Forfeited                            |  | (75,030                          | ) |  | 10.73                            |  
| | Balance at the
      end of the year |  | 8,306,782                        |   |  | 8.71                             |  

During the year ended December 31,
  2011, 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 December 31, 2011
  amounted to $458.

Page 23

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

The following table summarizes
  information about the Groups share options outstanding at December 31, 2011:

| |                           |  | Share purchase options outstanding |  |  | Share purchase options exercisable | 
| | ------------------------- |  | ---------------------------------- |  |  | ---------------------------------- | 
| |                           |  |                                    |  |  |                                    | 
| |                           |  | Number of                          |  |  | Weighted                           | 
| |                           |  | share                              |  |  | average                            | 
| |                           |  | purchase                           |  |  | exercise                           | 
| |                           |  | options                            |  |  | price                              | 
| | Exercise prices
      ($) |  | outstanding                        |  |  | ($/option)                         | 
| | 3.00                      |  | 155,258                            |  |  | 3.00                               | 
| | 5.00  5.35               |  | 3,171,794                          |  |  | 5.00                               | 
| | 7.59  8.25               |  | 2,461,330                          |  |  | 7.60                               | 
| | 9.74  11.55              |  | 350,000                            |  |  | 10.91                              | 
| | 15.44                     |  | 2,168,400                          |  |  | 15.44                              | 
| |                           |  | 8,306,782                          |  |  | 8.71                               | 

Share purchase options exercised during
  the year were as follows:

| |                                |  |                   |  |  | Weighted average |  |  | Weighted average | 
| | ------------------------------ |  | ----------------- |  |  | ---------------- |  |  | ---------------- | 
| |                                |  | Share purchase    |  |  | exercise price   |  |  | share price      | 
| | Period                         |  | options exercised |  |  | ($/option)       |  |  | ($)              | 
| | January 1  January 31, 2011   |  | 287,795           |  |  | 6.06             |  |  | 16.81            | 
| | February 1  February 28, 2011 |  | 257,818           |  |  | 5.03             |  |  | 19.34            | 
| | March 4  March 30, 2011       |  | 27,470            |  |  | 5.95             |  |  | 14.80            | 
| | April 1  April 29, 2011       |  | 134,375           |  |  | 6.91             |  |  | 13.37            | 
| | May 6, 2011                    |  | 4,000             |  |  | 7.59             |  |  | 11.52            | 
| | June 3 and June 27, 2011       |  | 10,650            |  |  | 3.00             |  |  | 11.32            | 
| | October 12  October 27, 2011  |  | 2,620             |  |  | 4.18             |  |  | 7.70             | 
| | November 24, 2011              |  | 1,020             |  |  | 3.00             |  |  | 6.42             | 
| | December 7, 2011               |  | 950               |  |  | 3.00             |  |  | 6.96             | 
| |                                |  | 726,698           |  |  | 5.79             |  |  | 16.83            | 

The weighted average fair value of
  share purchase options granted during the year was $6.35 (2010 $3.88) . 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:

Page 24

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

| |                         |   | For year ended December 31 | 
| | ----------------------- | - | -------------------------- | 
| |                         |   | 2011                       | 
| | Risk-free interest rate |   | 2.25%                      | 
| | Expected life           |   | 4.20 years                 | 
| | Expected volatility     |   | 64%                        | 
| | Grant date share price  | $ | 13.37                      | 
| | Expected dividend yield |   | 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. 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.

|(c) | Foreign Currency Translation
      Reserve
|--- | ------------------------------------------

| |                                                                                  |   | For year ended December 31 |  
| | -------------------------------------------------------------------------------- | - | -------------------------- | -
| |                                                                                  |   | 2011                       |  
| | Balance at beginning of year                                                     | $ | 316                        |  
| | Exchange gain(loss) on translation of investment in the
      Pebble Partnership |   | 2,236                      |  
| | Deferred income tax on investment                                                |   | (82                        | )
| | Balance at the
      end of year                                                 | $ | 2,470                      |  

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                                                                                                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                      
|   | 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 years ended December 31 | 
| | -------------------------------- | - | ------------------------------- | 
| | Compensation                     |   | 2011                            | 
| | Short-term employee benefits (1) | $ | 1,834                           | 
| | Share-based
      compensation   |   | 7,948                           | 
| | Total                            | $ | 9,782                           | 

| | (1) | Short-term employee benefits include salaries and
      directors fees.
| | --- | -----------------------------------------------------------------------

Page 25

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(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:

| |                                                                                  |   | For the years ended December 31 | 
| | -------------------------------------------------------------------------------- | - | ------------------------------- | 
| | Transactions                                                                     |   | 2011                            | 
| | Entities with significant influence                                              |   |                                 | 
| | Services rendered to the Group (a):                                              | $ | 3,504                           | 
| | Reimbursement of
      third party expenses incurred on behalf of the Group (a): |   | 1,074                           | 
| | Total paid by the Group                                                          | $ | 4,578                           | 
| | Jointly controlled entities                                                      |   |                                 | 
| | Reimbursement of third party expenses incurred by the
      Group (b)            | $ |                                | 
| | Total
      reimbursed (to) the Group                                            | $ |                                | 

| |                                                |   | As at December 31 |  |   | As at December 31 | 
| | ---------------------------------------------- | - | ----------------- |  | - | ----------------- | 
| | Balances
      receivable from related parties |   | 2011              |  |   | 2010              | 
| |                                                |   |                   |  |   |                   | 
| | Entities with significant influence (a)        | $ | 483               |  | $ |                  | 
| | Jointly controlled
      entities (b)          |   |                  |  |   | 75                | 
| | Total                                          | $ | 483               |  | $ | 75                | 

| |                                           |   | As at December 31 |  |   | As at December 31 | 
| | ----------------------------------------- | - | ----------------- |  | - | ----------------- | 
| | Balances
      payable to related parties |   | 2011              |  |   | 2010              | 
| | Entities with significant influence (a)   | $ |                  |  | $ | 102               | 

| | (a) | A private company provides geological, corporate
      development, administrative and management services to the Group and its
      subsidiaries at annually set rates pursuant to a management services
      agreement. The Company also incurs third party costs on behalf of the
      Group which is reimbursed by the Group at cost. Several directors and
      other key management personnel of the private company, who are close
      business associates, are also key management personnel of the
      Group.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (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 26

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|9. | AMOUNTS PAYABLE AND OTHER
      LIABILITIES
|-- | -------------------------------------------

| |                             |   | As at December 31 |  |   | As at December 31 | 
| | --------------------------- | - | ----------------- |  | - | ----------------- | 
| | Falling due within the year |   | 2011              |  |   | 2010              | 
| | Trade payables              | $ | 170               |  | $ | 452               | 

|10. | BASIC AND DILUTED LOSS PER SHARE                                                                                                
|--- | --------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                 
|    | The calculation of basic and diluted loss per share for
      the year ended December 31, 2011 was based on the
      following:

| |                                                            |   | As at December 31 |  |   | As at December 31 | 
| | ---------------------------------------------------------- | - | ----------------- |  | - | ----------------- | 
| |                                                            |   | 2011              |  |   | 2010              | 
| | Loss attributable to common shareholders                   | $ | 20,139            |  | $ | 14,115            | 
| | Weighted average
      number of common shares outstanding |   | 94,851,589        |  |   | 93,778,967        | 

|    | Diluted loss per share did not include the effect of
      8,306,782 (2010  6,795,110) share purchase options as they are
      anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|11. | 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. Management assesses the recoverability of the loan receivable
      from Liberty Star as at the end of each reporting period based on
      financial information available.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Groups loan receivable from Liberty Star (note 5(a))
      is secured by claims and assets owned by Liberty Star in Alaska,
      USA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Page 27

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

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.

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 $37 million in cash and cash
  equivalents for its own operating requirements. With the Pebble Projects 2012
  funding to be 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. 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. When the prefeasibility study is completed and if 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 may 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 December 31, 2011, the Group had
  working capital of approximately $42.5 million as compared to $43.3 million at
  December 31, 2010.

The Group has no contractual
  obligations other than current trade payables (note 9).

Foreign exchange risk

The Group is exposed to foreign
  exchange risk in respect to its loan receivable which is denominated 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 consolidated 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.

Page 28

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

The exposure of the Groups cash and
  cash equivalents, amounts receivable and balances receivable from related
  parties to foreign exchange risk is as follows:

| | Currency                        |   | As at December 31, 2011 |  |   | As at December 31, 2010 | 
| | ------------------------------- | - | ----------------------- |  | - | ----------------------- | 
| |                                 |   | Foreign                 |  |   | Amount in               | 
| |                                 |   | currency                |  |   | Canadian                | 
| | US dollars                      |   | amount                  |  |   | dollars                 | 
| |                                 |   |                         |  |   |                         | 
| | Amounts receivable              | $ | 4,220                   |  | $ | 4,292                   | 
| | Cash and cash
      equivalents |   | 36                      |  |   | 36                      | 
| | Total financial assets          | $ | 4,256                   |  | $ | 4,328                   | 

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 December 31, 2011 |  |   | As at December 31, 2010 | 
| | ------------------------------------- | - | ----------------------- |  | - | ----------------------- | 
| |                                       |   | Foreign                 |  |   | Amount in               | 
| |                                       |   | currency                |  |   | Canadian                | 
| | US dollars                            |   | amount                  |  |   | dollars                 | 
| |                                       |   |                         |  |   |                         | 
| | Amounts payable and other liabilities | $ | 1                       |  | $ | 1                       | 
| | Total financial
      liabilities     | $ | 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 $433 in the year (2010  $318). 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:

| |                |   | As at December 31 |  |   |      | 
| | -------------- | - | ----------------- |  | - | ---- | 
| |                |   | 2011              |  |   | 2010 | 
| | Effect on loss | $ | 389               |  | $ | 400  | 

Page 29

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

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 year.

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.

The Groups marketable securities are
  classified under Level 1 of the hierarchy and at December 31, 2011, had no value
  (2010  $1).

Page 30

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|12. | INCOME TAX EXPENSE
|--- | ------------------

| |                                           |   | Years Ended December 31 |  
| | ----------------------------------------- | - | ----------------------- | -
| |                                           |   | 2011                    |  
| | Current tax expense (recovery)            |   |                         |  
| | Current period                            | $ | (51                     | )
| |                                           |   |                         |  
| | Deferred tax expense (recovery)           |   |                         |  
| | Current period                            |   |                        |  
| | Deferred income
      tax liabilities     |   |                        |  
| |                                           |   |                         |  
| | Total income tax
      expense (recovery) | $ | (51                     | )

| | Reconciliation of
      effective tax rate       |  | Years Ended December 31 |   
| | ------------------------------------------------ |  | ----------------------- | --
| |                                                  |  | 2011                    |   
| |                                                  |  |                         |   
| | (Loss) for the period                            |  |                         |   
| | Total income tax expense (recovery)              |  |                         |   
| | (Loss) excluding income tax                      |  |                         |   
| | Income tax using the Company's domestic tax rate |  | 26.5 %                  |   
| | Non-deductible expenses                          |  | (18.6                   | )%
| | Reduction in statutory tax rates                 |  | (0.5                    | )%
| | Foreign exchange                                 |  | 0.4 %                   |   
| | Other                                            |  | 0.3 %                   |   
| | Deferred income tax assets not recognized        |  | (7.8                    | )%
| |                                                  |  | 0.3 %                   |   

| | Deferred income
      tax assets (liabilities) |   | As at
      December 31 |   |   | As at
      December 31 |  
| | ---------------------------------------------- | - | ----------------------- | - | - | ----------------------- | -
| |                                                |   | 2011                    |   |   | 2010                    |  
| | Resource pool                                  | $ | 21,614                  |   | $ | 19,861                  |  
| | Tax losses                                     |   | 57                      |   |   | 1,817                   |  
| | Net deferred income tax assets                 |   | 21,671                  |   |   | 21,678                  |  
| | Investment in the
      Pebble Partnership     |   | (25,386                 | ) |   | (25,311                 | )
| | Net deferred income tax liability              | $ | (3,715                  | ) | $ | (3,633                  | )

Page 31

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2011 and 2010                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

The Group had the following temporary
  differences at December 31, 2011 in respect of which no deferred tax asset has
  been recognized:

| | Expiry            |   | Tax Losses |  |   | Resource Pools |  |   | Other | 
| | ----------------- | - | ---------- |  | - | -------------- |  | - | ----- | 
| | Within one year   | $ |           |  | $ |               |  | $ |      | 
| | One to five years |   |           |  |   |               |  |   | 1,304 | 
| | After five years  |   | 23,859     |  |   |               |  |   |      | 
| | No expiry date    |   | 125        |  |   | 109,913        |  |   | 66    | 
| | Total             | $ | 23,984     |  | $ | 109,913        |  | $ | 1,370 | 

|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 financial position or results of operations which
      require additional disclosure of in these Financial
      Statements.

Page 32

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