---









CONSOLIDATEDFINANCIAL STATEMENTS



FOR THE YEARS ENDEDDECEMBER 31, 2016 and
2015



(Expressed in thousands of Canadian Dollars)







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|                            | Deloitte LLP
|--------------------------- | ------------
|2800 - 1055 Dunsmuir Street
|4 Bentall Centre           
|P.O. Box 49279             
|Vancouver BC V7X 1P4       
|Canada                     
|                           
|Tel: 604-669-4466          
|Fax: 778-374-0496          
|www.deloitte.ca            

Report of Independent Registered Public Accounting Firm

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. (the Company), which comprise the
  consolidated statements of financial position as at December 31, 2016 andDecember 31, 2015, and the consolidated statements of comprehensive loss,
  consolidated statements of changes in equity, and consolidated statements of
  cash flows for the years then ended, and a summary of significant accounting
  policies and other explanatory information.

Managements Responsibility for the Consolidated Financial
  StatementsManagement 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 ResponsibilityOur 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. We were not engaged to perform an audit of the Companys internal
  control over financial reporting. Our audits included consideration of internal
  control over financial reporting as a basis for designing audit procedures that
  are appropriate in the circumstances, but not for the purpose of expressing an
  opinion on the effectiveness of the Companys internal control over financial
  reporting. Accordingly, we express no such opinion.

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. 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.



Member of Deloitte Touche Tohmatsu Limited

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OpinionIn our opinion, the consolidated financial
  statements present fairly, in all material respects, the financial position of
  Northern Dynasty Minerals Ltd. as at December 31, 2016 and December 31, 2015,
  and its financial performance and its cash flows for the years then ended in
  accordance with International Financial Reporting Standards as issued by the
  International Accounting Standards Board.

Emphasis of MatterThe accompanying consolidated
  financial statements have been prepared assuming that the Company will continue
  as a going concern. As discussed in Note 1 of the consolidated financial
  statements, the Company incurred a net loss of $26,982,000 and $33,829,000
  during the years ended December 31, 2016 and 2015, respectively and had a
  deficit of $406,106,000 as at December 31, 2016. This condition, along with
  other matters as set forth in Note 1, indicate the existence of material
  uncertainties that raise substantial doubt about the Companys ability to
  continue as a going concern. Management's plans concerning these matters are
  also discussed in Note 1 to the consolidated financial statements. The
  consolidated financial statements do not include any adjustments that might
  result from the outcome of these uncertainties.

/s/ Deloitte LLP

Chartered Professional Accountants 
  March 30, 2017
  Vancouver, Canada

Page |2

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

|                                          |             |   | December 31 |   |   | December
    31 |  
|----------------------------------------- | ----------- | - | ----------- | - | - | --------------- | -
|                                          | Notes       |   | 2016        |   |   | 2015            |  
|                                          |             |   |             |   |   |                 |  
|ASSETS                                    |             |   |             |   |   |                 |  
|                                          |             |   |             |   |   |                 |  
|Non-current assets                        |             |   |             |   |   |                 |  
|Mineral property, plant and equipment     | 3           | $ | 142,472     |   | $ | 147,088         |  
|Total non-current assets                  |             |   | 142,472     |   |   | 147,088         |  
|                                          |             |   |             |   |   |                 |  
|Current assets                            |             |   |             |   |   |                 |  
|Available-for-sale financial assets       | 4           |   |            |   |   | 1,579           |  
|Amounts receivable and prepaid expenses   | 5           |   | 679         |   |   | 1,075           |  
|Restricted cash                           | 6 (b)       |   |            |   |   | 453             |  
|Cash
      and cash equivalents           | 6
      (a) |   | 7,196       |   |   | 7,509           |  
|Total current
      assets                |             |   | 7,875       |   |   | 10,616          |  
|                                          |             |   |             |   |   |                 |  
|Total Assets                              |             | $ | 150,347     |   | $ | 157,704         |  
|                                          |             |   |             |   |   |                 |  
|EQUITY                                    |             |   |             |   |   |                 |  
|                                          |             |   |             |   |   |                 |  
|Capital and reserves                      |             |   |             |   |   |                 |  
|Share capital                             | 7 (a)       | $ | 452,132     |   | $ | 435,069         |  
|Reserves                                  |             |   | 102,821     |   |   | 99,035          |  
|Deficit                                   |             |   | (406,106    | ) |   | (379,124        | )
|Total Equity                              |             |   | 148,847     |   |   | 154,980         |  
|                                          |             |   |             |   |   |                 |  
|LIABILITIES                               |             |   |             |   |   |                 |  
|                                          |             |   |             |   |   |                 |  
|Current liabilities                       |             |   |             |   |   |                 |  
|Payables to related parties               | 8           |   | 240         |   |   | 677             |  
|Trade
      and other payables            | 9           |   | 1,260       |   |   | 2,047           |  
|Total current
      liabilities           |             |   | 1,500       |   |   | 2,724           |  
|                                          |             |   |             |   |   |                 |  
|Total
      Liabilities                   |             |   | 1,500       |   |   | 2,724           |  
|                                          |             |   |             |   |   |                 |  
|Total Equity
      and Liabilities        |             | $ | 150,347     |   | $ | 157,704         |  
|                                          |             |   |             |   |   |                 |  
|Commitments (note 14)                     |             |   |             |   |   |                 |  
|Events after the reporting date (note 15) |             |   |             |   |   |                 |  

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

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

|/s/ Ronald W. Thiessen | /s/ Christian Milau
|---------------------- | -------------------
|                       |                    
|Ronald W. Thiessen     | Christian Milau    
|Director               | Director           

Page |3

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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     |   | 2016                   |  
|                                                                  |           |   |                        |  
|Expenses                                                          |           |   |                        |  
|Exploration and evaluation expenses                               | 3, 11     | $ | 7,935                  |  
|General and administrative expenses                               | 11        |   | 6,729                  |  
|Legal, accounting and audit                                       |           |   | 9,442                  |  
|Share-based compensation                                          | 7 (d)-(f) |   | 2,995                  |  
|Loss from operating activities                                    |           |   | 27,101                 |  
|Foreign exchange (gain) loss                                      |           |   | (43                    | )
|Interest income                                                   |           |   | (33                    | )
|Interest expense on loans                                         | 7 (b)     |   |                       |  
|Other income                                                      |           |   | (11                    | )
|Amount receivable written off                                     |           |   | 15                     |  
|Gain on sale of available-for-sale financial
      assets         |           |   | (70                    | )
|Loss
      on sale of plant and equipment                         |           |   | 23                     |  
|Loss before tax                                                   |           |   | 26,982                 |  
|Deferred income tax recovery                                      | 12        |   |                       |  
|Net loss                                                          |           | $ | 26,982                 |  
|                                                                  |           |   |                        |  
|Other comprehensive loss (income)                                 |           |   |                        |  
|Items that may be subsequently reclassified to loss               |           |   |                        |  
|Foreign exchange translation difference                           | 3, 7 (g)  |   | 4,246                  |  
|Change in fair value of available-for-sale
      financial assets | 4         |   |                       |  
|Derecognition of available-for-sale financial assets              | 4         |   | (105                   | )
|Other
      comprehensive loss (income)                           |           | $ | 4,141                  |  
|                                                                  |           |   |                        |  
|Total
      comprehensive loss                                    |           | $ | 31,123                 |  
|                                                                  |           |   |                        |  
|Basic and
      diluted loss per common share                     | 10        | $ | 0.11                   |  

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

Page |4

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

|                                                                                  |             |   | Year ended December 31 |  
|--------------------------------------------------------------------------------- | ----------- | - | ---------------------- | -
|                                                                                  | Notes       |   | 2016                   |  
|                                                                                  |             |   |                        |  
|Operating activities                                                              |             |   |                        |  
|Net loss                                                                          |             | $ | (26,982                | )
|Non-cash or non operating items                                                   |             |   |                        |  
|Amount receivable written off                                                     |             |   | 15                     |  
|Deferred income tax recovery                                                      |             |   |                       |  
|Depreciation                                                                      | 3           |   | 205                    |  
|Interest received on cash held                                                    |             |   | (33                    | )
|Interest expense on loans                                                         | 7 (b)       |   |                       |  
|Gain on sale of surplus site
      inventory                                      |             |   | (11                    | )
|Gain on sale of
      available-for-sale financial assets                         |             |   | (70                    | )
|Loss on sale of plant and
      equipment                                         |             |   | 23                     |  
|Share-based compensation                                                          |             |   | 2,995                  |  
|Unrealized exchange loss                                                          |             |   | 68                     |  
|Changes in working capital items                                                  |             |   |                        |  
|Restricted cash                                                                   |             |   | 453                    |  
|Amounts receivable and prepaid
      expenses                                     |             |   | 405                    |  
|Trade and other payables                                                          |             |   | (645                   | )
|Payables to related parties                                                       |             |   | (437                   | )
|                                                                                  |             |   |                        |  
|Net cash used in
      operating activities                                       |             |   | (24,014                | )
|                                                                                  |             |   |                        |  
|Investing activities                                                              |             |   |                        |  
|Acquisition of plant and equipment                                                | 3           |   |                       |  
|Proceeds from sale of equipment                                                   | 3           |   |                       |  
|Proceeds from sale of available-for-sale
      financial assets                   | 4           |   | 1,754                  |  
|Proceeds from sale of surplus site inventory                                      |             |   | 11                     |  
|Interest received on cash and cash equivalents                                    |             |   | 33                     |  
|Net cash from
      investing activities                                          |             |   | 1,798                  |  
|                                                                                  |             |   |                        |  
|Financing activities                                                              |             |   |                        |  
|Cash received on acquisitions net of
      transaction costs                      | 7 (b)       |   |                       |  
|Proceeds from prospectus unit financing net of
      transaction costs            | 7 (b)       |   | 16,030                 |  
|Proceeds from private placement unit financing
      net of transaction costs     | 7 (b)       |   | 1,967                  |  
|                                                                                  |             |   |                        |  
|Proceeds from private placment of special
      warrants net of transaction costs | 7 (b)       |   |                       |  
|                                                                                  |             |   |                        |  
|Proceeds from private placement of common
      shares net of transaction costs   | 7 (b)       |   |                       |  
|Proceeds from the exercise of share purchase options and warrants                 | 7
      (c) |   | 3,974                  |  
|Net cash from
      financing activities                                          |             |   | 21,971                 |  
|                                                                                  |             |   |                        |  
|Net decrease in cash and cash equivalents                                         |             |   | (245                   | )
|Effect of exchange rate fluctuations on cash and cash
      equivalents           |             |   | (68                    | )
|Cash and cash
      equivalents - beginning balance                               |             |   | 7,509                  |  
|                                                                                  |             |   |                        |  
|Cash and cash
      equivalents - ending balance                                  | 6
      (a) | $ | 7,196                  |  
|                                                                                  |             |   |                        |  
|Supplementary cash flow information (note 6(a))                                   |             |   |                        |  

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

Page |5

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NorthernDynasty MineralsLtd.Consolidated Statements of Changes in Equity
    (Expressed in
thousands of Canadian Dollars, except for share information)

|                                                                                                       | Notes |  | Share
    capital |  |   |         |  |   |                |  |   | Reserves        |  |   |             |   |   |                |   |   |          |   |   |           |  
|------------------------------------------------------------------------------------------------------ | ----- |  | ----------------- |  | - | ------- |  | - | -------------- |  | - | --------------- |  | - | ----------- | - | - | -------------- | - | - | -------- | - | - | --------- | -
|                                                                                                       |       |  |                   |  |   |         |  |   |                |  |   | Foreign         |  |   |             |   |   |                |   |   |          |   |   |           |  
|                                                                                                       |       |  | Number of         |  |   |         |  |   | Equity settled |  |   | currency        |  |   |             |   |   | Share          |   |   |          |   |   |           |  
|                                                                                                       |       |  | common            |  |   |         |  |   | share-based    |  |   | translation     |  |   | Investment  |   |   | Purchase       |   |   |          |   |   |           |  
|                                                                                                       |       |  | shares            |  |   |         |  |   | compensation   |  |   | reserve         |  |   | revaluation |   |   | Warrants       |   |   |          |   |   | **Total** |  
|                                                                                                       |       |  | (note
    7(a))   |  |   | Amount  |  |   | reserve        |  |   | (note
    7(g)) |  |   | reserve     |   |   | (note
    7c)) |   |   | Deficit  |   |   | equity    |  
|                                                                                                       |       |  |                   |  |   |         |  |   |                |  |   |                 |  |   |             |   |   |                |   |   |          |   |   |           |  
|Balance at January 1, 2015                                                                             |       |  | 95,009,864        |  | $ | 389,227 |  | $ | 55,294         |  | $ | 17,179          |  | $ | 6           |   | $ | 11,552         |   | $ | (345,295 | ) | $ | 127,963   |  
|Special warrants issued net of transaction costs                                                       | 7 (c) |  |                  |  |   |        |  |   |               |  |   |                |  |   |            |   |   | 17,485         |   |   |         |   |   | 17,485    |  
|Conversion of special warrants into common shares                                                      | 7 (c) |  | 73,562,735        |  |   | 29,037  |  |   |               |  |   |                |  |   |            |   |   | (29,037        | ) |   |         |   |   |          |  
|Common shares issued pursuant to a private placement, net
      of transaction costs                   | 7 (b) |  | 12,573,292        |  |   | 5,046   |  |   |               |  |   |                |  |   |            |   |   |               |   |   |         |   |   | 5,046     |  
|Common shares issued as referral fees relating to a private
      placement                            | 7 (b) |  | 300,000           |  |   | 120     |  |   |               |  |   |                |  |   |            |   |   |               |   |   |         |   |   | 120       |  
|Common shares issued for the acquisition of Cannon Point,
      net of transaction cost                | 7 (b) |  | 12,881,344        |  |   | 4,062   |  |   |               |  |   |                |  |   |            |   |   |               |   |   |         |   |   | 4,062     |  
|Options and warrants issued for the acquisition of Cannon
      Point                                  | 7 (b) |  |                  |  |   |        |  |   |               |  |   |                |  |   |            |   |   | 217            |   |   |         |   |   | 217       |  
|Common shares issued for the acquisition of Mission Gold                                               | 7 (b) |  | 27,593,341        |  |   | 7,564   |  |   |               |  |   |                |  |   |            |   |   |               |   |   |         |   |   | 7,564     |  
|Options and warrants issued pursuant to the acquisition of
      Mission Gold, net of transaction cost | 7 (b) |  |                  |  |   |        |  |   |               |  |   |                |  |   |            |   |   | 2,255          |   |   |         |   |   | 2,255     |  
|Common shares issued upon exercise of share purchase
      options not under option plan               | 7 (c) |  | 18,800            |  |   | 7       |  |   |               |  |   |                |  |   |            |   |   |               |   |   |         |   |   | 7         |  
|Fair value allocated to shares issued on options exercised                                             | 7 (c) |  |                  |  |   | 6       |  |   |               |  |   |                |  |   |            |   |   | (6             | ) |   |         |   |   |          |  
|Share-based
      compensation                                                                         | 7 (d) |  |                  |  |   |        |  |   | 903            |  |   |                |  |   |            |   |   |               |   |   |         |   |   | 903       |  
|Net loss                                                                                               |       |  |                  |  |   |        |  |   |               |  |   |                |  |   |            |   |   |               |   |   | (33,829  | ) |   | (33,829   | )
|Other
      comprehensive income (loss) net of tax                                                     |       |  |                  |  |   |        |  |   |               |  |   | 23,300          |  |   | (113        | ) |   |               |   |   |         |   |   | 23,187    |  
|Total
      comprehensive loss                                                                         |       |  |                   |  |   |         |  |   |                |  |   |                 |  |   |             |   |   |                |   |   |          |   |   | (10,642   | )
|                                                                                                       |       |  |                   |  |   |         |  |   |                |  |   |                 |  |   |             |   |   |                |   |   |          |   |   |           |  
|Balance at
      December 31, 2015                                                                     |       |  | 221,939,376       |  | $ | 435,069 |  | $ | 56,197         |  | $ | 40,479          |  | $ | (107        | ) | $ | 2,466          |   | $ | (379,124 | ) | $ | 154,980   |  

|Balance at January 1, 2016                                                                    |           |  | 221,939,376 |  | $ | 435,069 |  | $ | 56,197 |   | $ | 40,479 |   | $ | (107 | ) | $ | 2,466  |   | $ | (379,124 | ) | $ | 154,980 |  
|--------------------------------------------------------------------------------------------- | --------- |  | ----------- |  | - | ------- |  | - | ------ | - | - | ------ | - | - | ---- | - | - | ------ | - | - | -------- | - | - | ------- | -
|Common shares issued on exercise of share
      purchase options per option plan              | 7 (d)     |  | 548,869     |  |   | 503     |  |   |       |   |   |       |   |   |     |   |   |       |   |   |         |   |   | 503     |  
|Common shares issued upon exercise of share
      purchase options not issued per option plan | 7 (c)     |  | 376,000     |  |   | 132     |  |   |       |   |   |       |   |   |     |   |   |       |   |   |         |   |   | 132     |  
|Common shares issued upon exercise of
      warrants                                          | 7 (c)     |  | 5,560,940   |  |   | 3,363   |  |   |       |   |   |       |   |   |     |   |   |       |   |   |         |   |   | 3,363   |  
|Fair value allocated to shares issued on
      options exercised per plan                     | 7 (d)     |  |            |  |   | 266     |  |   | (266   | ) |   |       |   |   |     |   |   |       |   |   |         |   |   |        |  
|Fair value allocated to shares issued on
      options exercised not under option plan        | 7 (c)     |  |            |  |   | 98      |  |   |       |   |   |       |   |   |     |   |   | (98    | ) |   |         |   |   |        |  
|Fair value and costs allocated to share
      capital on exercise of warrants                 |           |  |            |  |   | 1,090   |  |   |       |   |   |       |   |   |     |   |   | (1,090 | ) |   |         |   |   |        |  
|Common Shares issued pursuant to prospectus
      financing, net of transaction costs         | 7 (b)     |  | 38,000,000  |  |   | 10,347  |  |   |       |   |   |       |   |   |     |   |   |       |   |   |         |   |   | 10,347  |  
|Warrants issued pursuant to prospectus
      financing, net of transaction costs              | 7 (b)     |  |            |  |   |        |  |   |       |   |   |       |   |   |     |   |   | 5,683  |   |   |         |   |   | 5,683   |  
|Common shares issued pursuant to private
      placement, net of transaction costs            | 7 (b)     |  | 4,444,376   |  |   | 1,264   |  |   |       |   |   |       |   |   |     |   |   |       |   |   |         |   |   | 1,264   |  
|Warrants issued pursuant to private
      placement, net of transaction costs                 | 7 (b)     |  |            |  |   |        |  |   |       |   |   |       |   |   |     |   |   | 703    |   |   |         |   |   | 703     |  
|Share-based compensation                                                                      | 7 (d)-(f) |  |            |  |   |        |  |   | 2,995  |   |   |       |   |   |     |   |   |       |   |   |         |   |   | 2,995   |  
|Net loss                                                                                      |           |  |            |  |   |        |  |   |       |   |   |       |   |   |     |   |   |       |   |   | (26,982  | ) |   | (26,982 | )
|Other comprehensive (loss) income net of tax                                                  |           |  |            |  |   |        |  |   |       |   |   | (4,246 | ) |   | 105  |   |   |       |   |   |         |   |   | (4,141  | )
|Total comprehensive loss                                                                      |           |  |             |  |   |         |  |   |        |   |   |        |   |   |      |   |   |        |   |   |          |   |   | (31,123 | )
|                                                                                              |           |  |             |  |   |         |  |   |        |   |   |        |   |   |      |   |   |        |   |   |          |   |   |         |  
|Balance at December 31, 2016                                                                  |           |  | 270,869,561 |  | $ | 452,132 |  | $ | 58,926 |   | $ | 36,233 |   | $ | (2   | ) | $ | 7,664  |   | $ | (406,106 | ) | $ | 148,847 |  

Theaccompanyingnotes are anintegralpart of theseconsolidatedfinancialstatements.

Page |6

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|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|1. | NATURE AND CONTINUANCE OF
  OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Northern Dynasty Minerals Ltd. (the "Company") is
      incorporated under the laws of the Province of British Columbia, Canada,
      and its principal business activity is the exploration of mineral
      properties. The Company is listed on the Toronto Stock Exchange ("TSX")
      under the symbol "NDM" and on the New York Stock Exchange-MKT ("NYSE-MKT")
      under the symbol "NAK". The Companys corporate office is located at 1040
      West Georgia Street, 15thfloor, Vancouver, British
      Columbia.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The consolidated financial statements ("Financial
      Statements") of the Company as at and for the year ended December 31,
      2016, include financial information for the Company and its subsidiaries
      (note 2(c)) (together referred to as the "Group" and individually as
      "Group entities"). The Company is the ultimate parent. The Groups core
      mineral property interest is the Pebble Copper-Gold-Molybdenum Project
      (the "Pebble Project") located in Alaska, United States of America ("USA"
      or "US").                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Group is in the process of exploring and developing
      the Pebble Project and has not yet determined whether the Pebble Project
      contains mineral reserves that are economically recoverable. The Groups
      continuing operations and the underlying value and recoverability of the
      amounts shown for the Groups mineral property interests, is entirely
      dependent upon the existence of economically recoverable mineral reserves;
      the ability of the Group to obtain financing to complete the exploration
      and development of the Pebble Project; the Group obtaining the necessary
      permits to mine; and future profitable production or proceeds from the
      disposition of the Pebble Project.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | During the year ended December 31, 2016, the Company
      raised aggregate gross proceeds of $19.1 million through a prospectus
      financing and a private placement of units, consisting of common shares
      and warrants (note 7(b)), $4.0 million from the exercise of share purchase
      options and warrants (notes 7(c)-(d)) and $1.8 million through the sale of
      available-for-sale financial assets (note 4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | As at December 31, 2016, the Group has $7.2 million in
      cash and cash equivalents for its operating requirements. The Group
      incurred a net loss of $27.0 million and $33.8 million during the years
      ended December 31, 2016 and 2015, respectively and had a deficit $406.1
      million as at December 31, 2016. Subsequent to the reporting period, the
      Group completed a bought deal financing and raised gross proceeds of
      approximately US$37.4 million (note 15). Accordingly, the Group has
      prioritized the allocation of available financial resources in order to
      meet key corporate and Pebble Project expenditure requirements for at
      least the next twelve months. Additional financing will be required in
      order to progress any material expenditures at the Pebble Project beyond
      2017. Additional financing may include any of or a combination of debt
      equity and/or contributions from possible new Pebble Project participants.
      There can be no assurances that the Group will be successful in obtaining
      additional financing. If the Group is unable to raise the necessary
      capital resources and generate sufficient cash flows to meet obligations
      as they come due, the Group may, at some point, consider reducing or
      curtailing its operations. As such there is material uncertainty that
      raises substantial doubt about the Companys ability to continue as a
      going concern.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | In July 2014, the United States Environmental Protection
      Agency (the "EPA") announced a proposal under Section 404(c) of the Clean
      Water Act to restrict and impose limitations on all discharges of dredged
      or fill material ("EPA Action") associated with mining the Pebble deposit.
      The Company believes that the EPA does not have the statutory authority to
      impose conditions on the development at Pebble prior to the submission of
      a detailed development plan and its thorough review by federal and state
      agencies, including review under the National Environmental Protection Act
      ("NEPA"). The Pebble Limited Partnership (the Pebble Partnership), a
      wholly-owned subsidiary of the Company, along with the State of Alaska and
      the Alaska Peninsula Corporation, an Alaska Native village corporation
      with extensive land holdings in the Pebble Project area, filed for an
      injunction to stop the EPA Action with the US Federal Court in Alaska (the
      "Court"). However, the Court has deferred judgment thereon until the EPA
      has issued a final determination. The Company appealed the Courts
      decision to the 9thCircuit Court of Appeals. The appeal was
      denied in May 2015. The Pebble Partnership still holds the option to
      pursue its statutory authority case in the
instance that EPA finalizes a pre-emptive
regulatory action under the Clean Water Act 404(c). In September 2014, the
Pebble Partnership initiated a second action against the EPA in federal district
court in Alaska charging that the EPA violated the Federal Advisory Committee
Act ("FACA"). In November 2014, the U.S. federal court judge in Alaska granted,
in relation to the FACA case, the Pebble Partnerships request for a preliminary
injunction, which, although considered by the Company as a significant
procedural milestone in the litigation, does not resolve the Pebble
Partnerships claims that the EPA Actions with respect to the Bristol Bay
Assessment and subsequent 404(c) regulatory process, violated FACA. In June
2015, the EPAs motion to dismiss the FACA case was rejected and as a result the
FACA case is moving forward. The Company expects its legal rights will be upheld
by the Court and that the Company will ultimately be able to apply for the
necessary permits under NEPA. On October 14, 2014, the Pebble Partnership filed
suit in the federal district court in Alaska charging that the EPA has violated
the Freedom of Information Act("FOIA") by improperly withholding
documents related to the Pebble Project, the Bristol Bay Watershed Assessment
and consideration of a pre-emptive 404(c) veto under the Clean Water Act.

Page |7

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

The EPA has moved for summary judgment
claiming that its search for and disclosure of documents was adequate. The
Pebble Partnership has opposed the motion pointing out several deficiencies in
the EPAs search parameters and pointing out the agencys overly broad assertion
of the deliberative process privilege to withhold documents. On August 24, 2015,
the U.S. federal court judge granted in part and deferred in part the EPAs
motion for summary judgement on the FOIA litigation. The court accepted the
EPAs position that it had made an adequate search for documents but left the
matter open should the EPA not meet its obligations in the FACA litigation or if
additional documents surface. Additionally, the judge ordered the EPA to produce
a sample of 183 partially or fully withheld documents so that it could conduct
an in camera review of the sample and test the merits of the EPAs withholdings
under the deliberative process privilege. Before producing this sample to the
Court, the EPA chose to voluntarily release 115 documents (or 63% of the sample
ordered by the Court), relinquishing its claim of privilege as to these
documents.

In briefings before the Court, the
Pebble Partnership argued that the voluntary release of 63% of the agencys same
documents conclusively demonstrated that the EPA had been over broad in its
assertion of the deliberative process privilege, particularly because the
content of the voluntarily released documents was not in fact deliberative. The
Court agreed, finding that the EPA "improperly withheld documents in full," and
that "many of the documents that the defendant released should have been
released to begin with because the portions that the defendant released were not
deliberative." It then ordered the EPA to review an additional 65 documents. Of
these 65 documents, the EPA voluntarily released 55 documents in whole or in
part (or 85% of the documents). Given the EPAs high rate of release, the Pebble
Partnership submitted a brief to the Court arguing that the EPA should be forced
to review the remaining documents being withheld and arguing that judgment
should not be granted to the agency at this time. A decision has not yet been
issued. The Court agreed, concluding that it had "no confidence that [the EPA]
has properly withheld documents, either in full or in part, pursuant to the
deliberative process privilege." The Court reiterated its earlier finding that
EPA had been withholding documents that "should never have been withheld to
begin with." As a result, the Court ordered the Agency to re-evaluate all
remaining documents the EPA is withholding in response to the Pebble
Partnerships January 2014 FOIA request and to submit these documents for in
camera review. After this review, the Court issued an order resolving Pebbles
challenges to the remaining withholdings and forcing EPA, yet again, to produce
additional documents that the agency had been improperly withholding for over
two years.

On October 27, 2016, the Pebble
Partnership and the EPA filed a joint Notice in federal court stating their
intent to enter into mediation in an effort to resolve ongoing litigation under
FACA.

On December 30, 2016, the Pebble
Partnership and the EPA filed a joint Notice in federal court staying the
ongoing FACA litigation until March 20, 2017 and, on that date, the parties
filed a Joint Motion in federal court to extend a stay of proceedings in ongoing
litigation under FACA to May 4, 2017 in the interest of resolving the matter.

Page |8

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|   | The Company has made substantial progress in recent
      direct discussions with the EPA and intends to continue negotiating the
      matter directly, rather than through mediation. US Government
      representatives are actively engaged in these discussions and, along with
      the Pebble Partnership, are focused on achieving a resolution that will be
      agreeable to both parties. In the meantime, the Courts Preliminary
      Injunction of November 25, 2014, will remain in effect for the duration of
      any stay.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2. | SIGNIFICANT ACCOUNTING
  POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|(a) | Statement of Compliance                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | These Financial Statements have been prepared in
      accordance with International Financial Reporting Standards ("IFRS") as
      issued by the International Accounting Standards Board ("IASB") and
      interpretations issued by the IFRS Interpretations Committee ("IFRIC"s)
      that are effective for the Groups reporting year ended December 31, 2016.
      These Financial Statements were authorized for issue by the Board of
      Directors on March 28, 2017.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(b) | Basis of Preparation                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | These Financial Statements have been prepared on a
      historical cost basis using the accrual basis of accounting, except for
      cash flow information and for financial instruments classified as
      available-for-sale, which are stated at their fair value (notes 2(e) and
      4). The accounting policies set out below have been applied consistently
      to all periods presented in these Financial Statements.                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(c) | Basis of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | These Financial Statements incorporate the financial
      statements of the Company, the Companys subsidiaries, and entities
      controlled by the Company and its subsidiaries listed
  below:                                                                                                                                                                                                                                                                                  

Name of Subsidiary1
    Place ofIncorporation
    Principal Activity
    Ownership3537137 Canada Inc. 2
    Canada
    Holding Company. Wholly-owned subsidiary of
      the Company.
    100%Pebble Services Inc.
    Nevada, USA
    Management and services
      company. Wholly-owned subsidiary of the Company.
    100%Northern Dynasty Partnership
    Alaska, USA
    Holds 99.9% of the Pebble Limited Partnership
      and 100% of Pebble Mines Corp.
    100% (indirect)Pebble Limited Partnership
    Alaska, USA
    Holding Company and
      Exploration of the Pebble Project.
    100% (indirect)Pebble Mines Corp.
    Delaware, USA
    General Partner. Holds 0.1% of Pebble Limited
      Partnership.
    100% (indirect)Pebble West Claims Corporation 3
    Alaska, USA
    Holding Company. Subsidiary of
      the Pebble Limited Partnership.
    100% (indirect)Pebble East Claims Corporation 4
    Alaska, USA
    Holding Company. Subsidiary of the Pebble
      Limited Partnership.
    100% (indirect)U5 Resources Inc. 5
    Nevada, USA
    Holding Company. Wholly-owned
      subsidiary of the Company.
    100%Cannon Point Resources Ltd.
    British Columbia, Canada
    Not active. Wholly-owned subsidiary of the
      Company.
    100%MGL Subco Ltd.
    British
      Columbia, Canada
    Not active. Wholly-owned
      subsidiary of the Company.
    100%


Page |9

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

Delta Minerals Inc.
    British Columbia, Canada
    Not active. Wholly-owned subsidiary of MGL
      Subco Ltd.
    100% (indirect)Imperial Gold Corporation
    British Columbia, Canada
    Not active. Wholly-owned
      subsidiary of Delta Minerals Inc.
    100% (indirect)Yuma Gold Inc.
    Nevada, USA
    Not active. Wholly-owned subsidiary of
      Imperial Gold Corporation.
    100% (indirect)


Notes:

| | 1. | An inactive wholly-owned subsidiary, 0796412 BC Ltd., was
      dissolved on February 17, 2016.                 
| | -- | ----------------------------------------------------------------------------------------------------------------
| | 2. | Holds 20% interest in the Northern Dynasty Partnership.
      The Company holds the remaining 80% interest.     
| | 3. | Holds the Pebble Project claims.                                                                                
| | 4. | Holds certain of the Pebble Project claims and claims
      located south and west of the Pebble Project claims.
| | 5. | Holds certain mineral claims located north of the Pebble
      Project claims.                                  

|    | Control is achieved when the Group is exposed, or has
      rights, to variable returns from its involvement with the investee and has
      the ability to affect those returns through its power over the investee.
      Specifically, the Group controls an investee if, and only if, the Company
      has power over the investee (i.e. existing rights that give it the current
      ability to direct the relevant activities of the investee); exposure, or
      rights, to variable returns from its involvement with the investee; and
      the ability to use its power over the investee to affect its
    returns.                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Intra-Group balances and transactions, including any
      unrealized income and expenses arising from intra- Group transactions, are
      eliminated in preparing the Financial Statements. 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) | 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 U5 Resources
      Inc., Pebble Services Inc., Pebble Mines Corp., the Pebble Partnership and
      its subsidiaries, and Yuma Gold Inc. is the US dollar and for all other
      entities within the Group, the functional currency is the Canadian dollar.
      The functional currency determinations were conducted through an analysis
      of the factors for consideration 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.         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The results and financial position of entities within the
      Group which have a functional currency that differs from that of the Group
      are translated into Canadian dollars as follows: (i) assets and
      liabilities for each statement of financial position are translated at the
      closing exchange rate at that date; (ii) income and expenses for each
      income statement are translated at average exchange rates for the period;
      and (iii) the resulting exchange differences are included in the foreign
      currency translation reserve within equity.                                                                             

Page |10

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|(e) | Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Non-derivative financial assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The Group has the following non-derivative financial
      assets: available-for-sale financial assets (note 4) and loans and
      receivables.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | 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 at fair value through profit or loss. 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 consist of cash and cash
      equivalents, restricted cash (note 6), and amounts receivable (note
    5).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Cash and cash equivalents and
      restricted cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Cash and cash equivalents and restricted cash in the
      statements of financial position are comprised of cash and highly liquid
      investments having maturity dates of three months or less from the date of
      purchase, which are readily convertible into known amounts of
  cash.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The Groups cash and cash equivalents and restricted cash
      are invested in business and savings accounts and guaranteed investment
      certificates at major financial institutions and are available on demand
      by the Group for its programs and, as such, are subject to an
      insignificant risk of change in value.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Non-derivative financial liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The Groups non-derivative financial liabilities comprise
      trade and other payables (note 9) and a payable to a related party (note
      8(b)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | All financial liabilities fall within the classification
      of other financial liabilities versus financial liabilities through profit
      or 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 |11

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

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 reporting
  period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Derivative financial assets and
  liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Group has no derivative financial assets or
      liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(f) | 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.                                                                                                                                                                                                                                                                                                                                                                         

Page |12

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

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
      assets.                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(g) | Mineral property, plant and
  equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Mineral property, plant and equipment are carried at
      cost, less accumulated depreciation and accumulated impairment
    losses.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The cost of mineral property, plant and equipment
      consists of the acquisition costs transferred from E&E assets, any
      costs directly attributable to bringing the asset to the location and
      condition necessary for its intended use, including costs to further
      delineate the ore body, development and construction costs, removal of
      overburden to initially expose the ore body, an initial estimate of the
      costs of dismantling, removing the item and restoring the site on which it
      is located and, if applicable, borrowing costs.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Mineral property acquisition and development costs are
      not currently depreciated as the Pebble Project is still in the
      development stage and no saleable minerals are being produced.                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The cost of an item of plant and equipment 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 plant and equipment, less their estimated residual value,
      using the declining balance method at various rates ranging from 20% to
      30% per annum.                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | An item of equipment 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 equipment consists of major components
      with different useful lives, the components are accounted for as separate
      items of equipment. Expenditures incurred to replace a component of an
      item of equipment that is accounted for separately, including major
      inspection and overhaul expenditures, are capitalized.                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Residual values and estimated useful lives are reviewed
      at least annually.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Page |13

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|(h) | Impairment of Non-Financial
Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | At the end of each reporting period the carrying amounts
      of the Groups non-financial assets are reviewed to determine whether
      there is any indication that these 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 loss, 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 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. This increase in the carrying
      amount is limited to 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(i) | Share Capital, Special Warrants and
      Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Common shares, special warrants and warrants (notes
      7(b)-(c)) are classified as equity. Transaction costs directly
      attributable to the issue of common shares, share purchase options,
      special warrants and warrants are recognized as a deduction from equity,
      net of any tax effects. Where units comprising of common shares and
      warrants are issued (note 7(b)), the proceeds and any transaction costs
      are apportioned between the common shares and warrants according to their
      relative fair values.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Upon conversion of special warrants and warrants into
      common shares, the carrying amount, net of a pro rata share of the
      transaction costs, is transferred to common share capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(j) | Share-based Payment Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Equity-settled share-based Option
    Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Group operates an equity-settled share-based option
      plan for its employees and service providers (note 7(d)). 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 (the "Equity Reserve"). 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 Reserve. The fair
      value of 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Page |14

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|    | Deferred Share Unit ("DSU") Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The Group adopted and operates a DSU plan for its
      non-executive directors. The Group determines whether to account for DSUs
      as equity-settled or cash-settled based on the terms of the contractual
      arrangement. The fair value of DSUs granted is recognized as an employee
      expense with a corresponding increase in the Equity Reserve if deemed
      equity-settled or a liability is raised if cash-settled at grant
    date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The fair value is estimated using the quoted market price
      of the Companys common shares at grant date and expensed over the vesting
      period as share-based compensation in the statement of loss and
      comprehensive loss until they are fully vested. If the DSUs are
      cash-settled, the expense and liability are adjusted each reporting period
      for changes in the quoted market price of the Companys common
    shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Restricted Share Unit ("RSU")
Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The Group has also adopted a RSU plan for its employees,
      executive directors and eligible consultants of the Group. The Group
      determines whether to account for the RSUs as equity-settled or
      cash-settled based on the terms of the contractual arrangement. The fair
      value of RSUs is recognized as an employee expense with a corresponding
      increase in the Equity Reserve if deemed equity settled or a liability is
      raised if cash settled at grant date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The fair value is estimated using the number of RSUs and
      the quoted market price of the Companys common shares at the grant date.
      It is then expensed over the vesting period with the credit recognized in
      equity in the Equity Reserve. If cash-settled, the expense and liability
      are adjusted each reporting period for changes in the quoted market value
      of the Companys common shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(k) | 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 regard to
      previous years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Deferred tax is provided using the balance sheet
      liability method, providing for unused tax loss carry forwards 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Additional income taxes that arise from the distribution
      of dividends are recognized at the same time as the liability to pay the
      related dividend.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Page |15

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(l) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(m) | 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 and any fully prepaid special warrants outstanding during the year.
      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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(n) | Segment Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The Group operates in a single reportable operating
      segment  the acquisition, exploration and development of mineral
      properties. The Groups core asset, the Pebble Project, is located in
      Alaska, USA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(o) | 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.

Page |16

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

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:

| | 1. | The Group uses the Black-Scholes option pricing model to
      calculate the fair value of share purchase options granted for determining
      share-based compensation included in the loss for the year. Inputs used in
      this model require subjective assumptions, including the expected price
      volatility from three to five years. Changes in the subjective input
      assumptions can affect the fair value estimate, and therefore the existing
      models do not necessarily provide a reliable single measure of the fair
      value of the Groups share purchase options. The weighted average
      assumptions applied are disclosed in Note 7(d).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Significant assumptions about the future and other
      sources of estimation uncertainty are made in determining the provision
      for any deferred income tax expense included in the loss for the year and
      the composition of deferred income tax liabilities included in the
      Statement of Financial Position.                                                                                                                                                                                                                                                                                                                                                

Critical
accounting judgments

These include:

| | 1. | In terms of IFRS 6, Exploration for and Evaluation of
      Mineral Resources,management identified indicators that required
      testing the Groups mineral property interest ("MPI") for impairment. The
      Group used judgment in determining from an analysis of facts and
      circumstances that no impairment of the MPI was necessary.                                                                                 
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Pursuant to IAS 21, The Effects of Changes in Foreign
      Exchange Rates("IAS 21") in determining the functional currency of
      the parent and its subsidiaries, the Group used judgment in identifying
      the currency in which financing activities are denominated and the
      currency that mainly influences the cost of undertaking the business
      activities in each jurisdiction in which each entity operates.
| | 3. | The Group has employed judgement that going concern was
      an appropriate basis for the preparation of the Financial Statements, as
      the Group considered existing and future available financial resources
      (note 15) in determining that such financial resources are able to meet
      key corporate Pebble Project expenditure requirements for at least the
      next twelve months (refer note 1).              

|(p) | Amendments, Interpretations, Revised and New Standards
      Adopted by the Group                              
|--- | ---------------------------------------------------------------------------------------------------------------
|    |                                                                                                                
|    | The Group adopted the following amendments and annual
      improvements that became effective January 1,
2016:

     
Amendments to IAS 1, Presentation of Financial Statements      Amendments to IAS 16, Property, Plant
and Equipment      Amendments to IAS 28,
Investments in Associates      Amendments
to IAS 38, Intangible Assets     
Amendments to IFRS 10, Consolidated Financial Statements      Amendments to IFRS 11, Joint
Arrangements      Annual improvements to IFRS
2012  2014 Cycle ("AIP 2012-2014")

The amendments and annual improvements
had no material effect on the Financial Statements.

Page |17

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|(q) | Accounting Standards, Amendments and Revised Standards
      Not Yet Effective
      Effective for annual periods commencing on or after
      January 1, 2018
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | IFRS 9, Financial Instruments("IFRS 9")                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   | IFRS 9 replaces IAS 39, Financial Instruments:
      Recognition and Measurement, in its entirety. The standard
      incorporates a number of improvements: a) includes a logical model for
      classification and measurement (IFRS 9 provides for principle-based
      approach to classification which is driven by cash flow characteristics
      and the business model in which an asset is held); b) includes a single,
      forward-looking "expected loss" impairment model (IFRS 9 will require
      entities to account for expected credit losses from when financial
      instruments are first recognized and to recognize full lifetime expected
      losses on a timely basis); and c) includes a substantially-reformed model
      for hedge accounting with enhanced disclosures about risk management
      activity (IFRS 9s new model aligns the accounting treatment with risk
      management activities). The standard permits early adoption.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   | The Group will adopt IFRS 9 at the effective date and
      anticipates that the adoption will have no material impact on its
      financial statements given the extent of its current use of financial
      instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | IFRS 15, Revenue from Contracts with Customers("IFRS 15")                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   | IFRS 15 supersedes IAS 11, Construction Contracts,IAS 18, Revenue,IFRIC 13, Customer LoyaltyProgrammes,IFRIC 15, Agreements for the Construction of
      Real Estate,IFRIC 18, Transfers of Assetsfrom Customersand SIC 31, Revenue  Barter Transactions Involving Advertising
      Services.IFRS 15 establishes a single five-step model framework for
      determining the nature, amount, timing and certainty of revenue and cash
      flows arising from a contract with a customer. The standard permits early
      adoption.                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   | The Group will adopt IFRS 15 at the effective date and
      anticipates that the adoption will have no material impact on its
      financial statements as the Group does not generate significant revenue
      given the Groups current stage of development of the Pebble Project. The
      Group will reassess the impact once significant revenue is generated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Effective for
annual periods commencing on or after January 1, 2019

| |  | IFRS 16, Leases ("IFRS 16") and revised IAS 17, Leases
      ("IAS 17").                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   | The IASB issued IFRS 16 and revised IAS 17 in January
      2016. IFRS 16 specifies how to recognize, measure, present and disclose
      leases. IFRS 16 provides a single lessee accounting model, requiring the
      recognition of assets and liabilities for all leases, unless the term of
      the lease is twelve months or less or the underlying asset has a low
      value. Lessor accounting however remains unchanged from IAS 17 and the
      distinction between operating and finance leases is retained. IAS 17, as
      revised, now prescribes the accounting policies and disclosures applicable
      to leases, both for lessees and lessors.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   | The Group will adopt IFRS 16 at the effective date and
      anticipates that the adoption will not have a significant impact other
      than the accounting for office, accommodation and storage leases the Group
      may have entered into where the minimum lease term is more than 12 months.
      In October 2016, the Group entered into a 5 year long term office lease
      (refer note 14).                                                                                                                                                                                                                                                              

Page |18

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|3. | MINERAL PROPERTY, PLANT AND
  EQUIPMENT                                            
|-- | -----------------------------------------------------------------------------------
|   |                                                                                    
|   | The Groups exploration and evaluation assets are
      comprised of the following:

| | Year ended December
      31, 2016      |   | Mineral Property |  |   | Plant and |   |   |         |  
| | --------------------------------------- | - | ---------------- |  | - | --------- | - | - | ------- | -
| |                                         |   | interest 1       |  |   | equipment |   |   | Total   |  
| | Cost                                    |   |                  |  |   |           |   |   |         |  
| | Beginning balance                       | $ | 112,541          |  | $ | 1,032     |   | $ | 113,573 |  
| | Additions                               |   |                 |  |   |          |   |   |        |  
| | Dispositions                            |   |                 |  |   | (151      | ) |   | (151    | )
| | Ending balance                          | $ | 112,541          |  | $ | 881       |   | $ | 113,422 |  
| |                                         |   |                  |  |   |           |   |   |         |  
| | Accumulated depreciation                |   |                  |  |   |           |   |   |         |  
| | Beginning balance                       | $ |                 |  | $ | (481      | ) | $ | (481    | )
| | Depreciation 2                          |   |                 |  |   | (205      | ) |   | (205    | )
| | Eliminated on disposal                  |   |                 |  |   | 128       |   |   | 128     |  
| | Ending balance                          | $ |                 |  | $ | (558      | ) | $ | (558    | )
| |                                         |   |                  |  |   |           |   |   |         |  
| | Foreign currency translation difference |   | 29,381           |  |   | 227       |   |   | 29,608  |  
| |                                         |   |                  |  |   |           |   |   |         |  
| | Net carrying value  Ending balance     | $ | 141,922          |  | $ | 550       |   | $ | 142,472 |  

| | Year ended December 31, 2015                  |   | Mineral Property |  |   | Plant and |   |   |         |  
| | --------------------------------------------- | - | ---------------- |  | - | --------- | - | - | ------- | -
| |                                               |   | interest 1       |  |   | equipment |   |   | Total   |  
| | Cost                                          |   |                  |  |   |           |   |   |         |  
| | Beginning balance                             | $ | 112,541          |  | $ | 1,155     |   | $ | 113,696 |  
| | Additions                                     |   |                 |  |   | 28        |   |   | 28      |  
| | Dispositions                                  |   |                 |  |   | (151      | ) |   | (151    | )
| | Ending balance                                | $ | 112,541          |  | $ | 1,032     |   | $ | 113,573 |  
| |                                               |   |                  |  |   |           |   |   |         |  
| | Accumulated depreciation                      |   |                  |  |   |           |   |   |         |  
| | Beginning balance                             | $ |                 |  | $ | (278      | ) | $ | (278    | )
| | Depreciation 2                                |   |                 |  |   | (279      | ) |   | (279    | )
| | Eliminated on
      disposal                  |   |                 |  |   | 76        |   |   | 76      |  
| | Ending balance                                | $ |                 |  | $ | (481      | ) | $ | (481    | )
| |                                               |   |                  |  |   |           |   |   |         |  
| | Foreign currency
      translation difference |   | 33,743           |  |   | 253       |   |   | 33,996  |  
| |                                               |   |                  |  |   |           |   |   |         |  
| | Net carrying
      value  Ending balance     | $ | 146,284          |  | $ | 804       |   | $ | 147,088 |  

Notes to table:

| | 1. | Comprises the Pebble Project, a contiguous block of 2,402
      mineral claims covering approximately 417 square miles located in
      southwest Alaska, 17 miles (30 kilometers) from the villages of Iliamna
      and Newhalen, and approximately 200 miles (320 kilometers) southwest of
      the city of Anchorage.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                           
| | 2. | Depreciation is included in exploration and evaluation
      expenses.                                                                                                                                                                                                                                                    

Page |19

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|4. | AVAILABLE-FOR-SALE FINANCIAL
  ASSETS                                                                                                                                                                                                                                                                                                       
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                             
|   | The Groups available-for-sale financial assets was
      comprised of an investment in marketable securities of a Canadian publicly
      listed company acquired through the acquisition of Mission Gold Ltd. (note
      7(b)). The Group disposed of the marketable securities for $1,754 during
      the year ended December 31, 2016.
|   |                                                                                                                                                                                                                                                                                                                                             
|5. | AMOUNTS RECEIVABLE AND PREPAID
    EXPENSES                                                                                                                                                                                                                                                                                                 

| |                      |  | December 31 |  |   | December 31 | 
| | -------------------- |  | ----------- |  | - | ----------- | 
| |                      |  | 2016        |  |   | 2015        | 
| | Sales tax receivable |  | 50          |  | $ | 164         | 
| | Amounts receivable   |  | 138         |  |   | 514         | 
| | Prepaid expenses     |  | 491         |  |   | 397         | 
| | Total                |  | 679         |  | $ | 1,075       | 

|6. | CASH AND CASH EQUIVALENTS AND RESTRICTED
      CASH
|-- | ---------------------------------------------------

|(a) | Cash and Cash
Equivalents
|--- | -------------------------

| |                                     |   | December 31 |  |   | December 31 | 
| | ----------------------------------- | - | ----------- |  | - | ----------- | 
| |                                     |   | 2016        |  |   | 2015        | 
| | Business and
      savings accounts | $ | 7,196       |  | $ | 7,509       | 

Supplementary
cash flow information

Non-cash investing and financing
activities:

| |  | In the year ended December 31, 2016, 41,334 options were
      exercised and common shares were issued but not delivered as payment was
      only received after the reporting date (note 15).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In the year ended December 31,
      2015, the following non-cash transactions occurred:                                                                                                       

| | (a) | The Group converted special warrants on a one-for-one
      basis into common shares of the Company at no additional cost to the
      holder (note 7(c)); and
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | The Group issued options and warrants pursuant to the
      acquisition of Cannon Point Resources Ltd. and Mission Gold Ltd. (note
      7(b)).               

|(b) | Restricted Cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Group held restricted cash in the amount of $453 at
      December 31, 2015 for certain equipment demobilization expenses relating
      to the Pebble Partnerships activities undertaken while it was subject to
      joint control of the Group and Anglo American plc. ("Anglo American").
      This cash was not available for general use by the Group. During the year
      ended December 31, 2016, the Group drew down $393 from restricted cash for
      expenditures incurred in the last quarter of 2015 and returned the
      remaining balance of $60 to Anglo American in accordance with the terms of
      the agreement between both parties.

Page |20

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|7. | CAPITAL AND
RESERVES
|-- | --------------------

|(a) | Authorized Share Capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | At December 31, 2016, the authorized share capital
      comprised an unlimited (2015  unlimited) number of common shares with no
      par value. As of the reporting date, the Company had 270,828,227 common
      shares issued and fully paid and 41,334 common shares issued to be
      delivered on receipt of payment (note 7(d)).                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(b) | Financings and Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 2016 Prospectus Financing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | In June 2016, the Group completed a prospectus offering
      of 38,000,000 units in the capital of the Company at a price of $0.45 per
      unit for gross proceeds of $17,100. Each Unit consisted of one common
      share and one common share purchase warrant, which entitles the holder to
      purchase an additional common share at an exercise price of $0.65 per
      common share until June 10, 2021.                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | As of the reporting date, the Group incurred a total of
      $1,070 in issuance costs related to agents, advisory, regulatory and legal
      fees. The Group apportioned the gross proceeds and issuance costs between
      share capital and warrants based on their relative fair values on date of
      issue, with share capital using the quoted market price for shares on date
      of issue and warrants based on the Black Scholes option pricing model
      (using inputs of $0.65 exercise price; $0.42 valuation date share price;
      81% expected volatility; 0.57% risk free rate; 5 years remaining life; and
      nil% dividend). Accordingly, net proceeds of $10,347 was allocated to
      share capital and $5,683 to warrants.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 2016 Private Placement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | In July 2016, the Group completed a private placement of
      4,444,376 units in the capital of the Company, each unit comprising of one
      common share and one share purchase warrant, at a price of $0.45 per unit
      for gross proceeds of $2,000. Each share purchase warrant is exercisable
      into one common share at an exercise price of $0.65 per common share until
      June 10, 2021. The common shares and share purchase warrants were subject
      to applicable resale restrictions, including a four month hold under
      Canadian legislation.                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | As of the reporting date, the Group incurred a total of
      $33 in issuance costs related to regulatory and legal fees. The Group
      apportioned the gross proceeds and issuance costs between share capital
      and warrants based on their relative fair values on date of issue, with
      share capital using the quoted market price for shares on date of issue
      and warrants based on the Black Scholes option pricing model (using inputs
      of $0.65 exercise price; $0.45 valuation date share price; 81% expected
      volatility; 0.54% risk free rate; 5 years remaining life; and nil%
      dividend). Accordingly, net proceeds of $1,264 was allocated to share
      capital and $703 to warrants.                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 2015 Private Placement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | In December 2015, the Group completed a private placement
      of 12,573,292 common shares in the Company at a price of $0.412 per share
      for gross proceeds of $5,180. The Group issued 300,000 common shares as
      referral fees to an arms length third party and recorded the fair value
      of these common shares of $120 as share issuance cost. Other legal and
      regulatory costs incurred in relation to the private placement was
    $14.                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 2015 Acquisition of Listed
Entities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

During the year ended December 31,
2015, the Group acquired TSX Venture listed entities, Cannon Point Resources
Ltd. ("Cannon Point") and Mission Gold Ltd. ("Mission Gold"), each by way of a
plan of arrangement in which the Group acquired 100% of the issued and
outstanding common shares by issuing 12,881,344 and 27,593,341 common shares
respectively. The acquisitions enabled the Group to have access to their primary
asset being cash resources of which Cannon Point had $4,397 and Mission Gold had
$8,338. The Group incurred transaction costs of $104 and $284 respectively which
was recorded within equity.

Page |21

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

Pursuant to the Cannon Point
arrangement, Cannon Point advanced to the Group $4,250 (the "Cash Advance") with
a one year term at an interest rate of 15% per annum. The Group accrued $103 in
interest on the Cash Advance up to the date of the acquisition.

Pursuant to the Mission Gold
arrangement, Mission Gold provided the Group with a credit facility of $8.4
million (the "Credit Facility") with a 6-month term at an interest rate of 15%
per annum. The Group only drew down $2 million of the Credit Facility before the
acquisition was completed and accrued $41 in interest on the $2 million from the
Credit Facility up to that date.

The following is a summary of each
acquisition:

| |                                                                                  |   | Cannon Point     |   |   | Mission Gold     | 
| | -------------------------------------------------------------------------------- | - | ---------------- | - | - | ---------------- | 
| |                                                                                  |   | Fair
      value |   |   | Fair
      value | 
| | Cash and cash equivalents                                                        | $ | 4,397            |   | $ | 8,338            | 
| | Common shares of a publicly listed investment (note 4)                           |   |                 |   |   | 1,684            | 
| | Amounts receivable                                                               |   | 126              |   |   | 81               | 
| | Accounts payable
      and accrued liabilities assumed                           |   | (140             | ) |   |                 | 
| | Financial instruments acquired                                                   | $ | 4,383            |   | $ | 10,103           | 
| |                                                                                  |   |                  |   |   |                  | 
| | Consideration 1:                                                                 |   |                  |   |   |                  | 
| | Common shares issued (12,881,344 and 27,593,341)                                 | $ | 4,166            |   | $ | 7,838            | 
| | Share purchase warrants and options (4,394,500 and
      16,673,348 (note 7(c))) |   | 217              |   |   | 2,265            | 
| | Total
      consideration                                                        | $ | 4,383            |   | $ | 10,103           | 

Note

| | 1. | The fair value of the financial assets and liabilities
      was allocated to the common shares and the share purchase options/warrants
      issued in proportion to their relative fair values; for common shares, the
      quoted market price on date of issue was used and for the options and
      warrants, the Black Scholes options pricing model was used (using weighted
      average valuation inputs for i) Cannon Point: $1.63 exercise price; $0.55
      valuation date share price; 87% expected volatility; 0.49% risk free rate;
      0.82 years remaining life; and nil% dividend yield; and ii) Mission Gold:
      $0.97 exercise price; $.43 valuation date share price; 83% expected
      volatility; 0.59% risk free rate; 4.06 years remaining life; and nil%
      dividend yield).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page |22

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|(c) | Share Purchase Warrants and Options not Issued under
      the Groups Incentive Plan                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                      
|    | The following reconciles warrants and non-employee
      options (options which are not issued under the Groups incentive plan
      (note 7(d)), each exercisable to acquire one common share, at the
      beginning and end of the year for 2016:

Year ended December 31, 2016Exerciseprice percommon
    
    
    Beginning
    
    
    
    
    
    
    
    
    
    
    
    Endingshare ($)
    Expiry date
    
    balance
    
    
    Issued
    
    
    Exercised
    
    
    Expired
    
    
    balanceOptions issued pursuant to the acquisition of Cannon
      Point0.29
    January 29, 2016
    
    150,400
    
    
    
    
    
    (150,400
    )
    
    
    
    
    0.37
    January 29, 2016
    
    220,900
    
    
    
    
    
    (61,100
    )
    
    (159,800
    )
    
    0.40
    January 29, 2016
    
    150,400
    
    
    
    
    
    
    
    
    (150,400
    )
    
    0.43
    January 29, 2016
    
    37,600
    
    
    
    
    
    
    
    
    (37,600
    )
    
    0.37
    July 23, 2017
    
    18,800
    
    
    
    
    
    
    
    
    
    
    
    18,8000.37
    June 30, 2019
    
    56,400
    
    
    
    
    
    
    
    
    
    
    
    56,4000.40
    June 30, 2019
    
    225,600
    
    
    
    
    
    (133,950
    )
    
    
    
    
    91,6500.37
    March 10, 2021
    
    9,400
    
    
    
    
    
    
    
    
    
    
    
    9,4000.40
    March 10, 2021
    
    150,400
    
    
    
    
    
    (11,750
    )
    
    
    
    
    138,6500.37
    December 15,
      2021
    
    37,600
    
    
    
    
    
    
    
    
    
    
    
    37,6000.40
    December 12,
      2022
    
    75,200
    
    
    
    
    
    (18,800
    )
    
    
    
    
    56,4000.29
    December 8, 2024
    
    37,600
    
    
    
    
    
    
    
    
    
    
    
    37,600Total
    
    
    1,170,300
    
    
    
    
    
    (376,000
    )
    
    (347,800
    )
    
    446,500Warrants issued pursuant to the acquisition of Mission
      Gold0.55
    July 9, 2020
    
    13,801,672
    
    
    
    
    
    (2,512,974
    )
    
    
    
    
    11,288,6983.00
    September 14, 2017
    
    2,871,676
    
    
    
    
    
    
    
    
    
    
    
    2,871,676Total
    
    
    16,673,348
    
    
    
    
    
    (2,512,974
    )
    
    
    
    
    14,160,374Warrants issued pursuant to financings10.65
    June 10, 2021
    
    
    
    
    42,444,376
    
    
    (3,047,966
    )
    
    
    
    
    39,396,410Total
    
    
    
    
    
    42,444,376
    
    
    (3,047,966
    )
    
    
    
    
    39,396,410Grand Total
    
    
    17,843,648
    
    
    42,444,376
    
    
    (5,936,940
    )
    
    (347,800
    )
    
    54,003,284


Note to 2016 table:

| | 1. | The Group issued warrants pursuant to the June 2016
      prospectus and July 2016 private placement financings (note
  7(b)).
| | -- | ------------------------------------------------------------------------------------------------------------------------------

At December 31, 2016, warrants and
non-employee options had a weighted average exercise price of $0.75 (2015 
$0.93) and a weighted average remaining life of 4.05 years (2015  3.94
years).

Page |23

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

The following table reconciles warrants
for year ended December 31, 2015:

Year
      ended December 31, 2015Exerciseprice percommon
    
    
    Beginning
    
    
    
    
    
    Exercised/
    
    
    
    
    
    Endingshare ($)
    Expiry date
    
    balance
    
    
    Issued
    
    
    conversion
    
    
    Expired
    
    
    balanceSpecial warrants issued for cash1nil
    Not applicable
    
    27,622,642
    
    
    45,940,093
    
    
    (73,562,735
    )
    
    
    
    
    Warrants and options issued pursuant to the acquisition
      of Cannon Point20.37
    December 2, 2015
    
    
    
    
    28,200
    
    
    
    
    
    (28,200
    )
    
    0.40
    December 2, 2015
    
    
    
    
    47,000
    
    
    
    
    
    (47,000
    )
    
    2.13
    December 17, 2015
    
    
    
    
    3,149,000
    
    
    
    
    
    (3,149,000
    )
    
    0.29
    January 29, 2016
    
    
    
    
    150,400
    
    
    
    
    
    
    
    
    150,4000.37
    January 29, 2016
    
    
    
    
    220,900
    
    
    
    
    
    
    
    
    220,9000.40
    January 29, 2016
    
    
    
    
    150,400
    
    
    
    
    
    
    
    
    150,4000.43
    January 29, 2016
    
    
    
    
    37,600
    
    
    
    
    
    
    
    
    37,6000.37
    July 23, 2017 3
    
    
    
    
    18,800
    
    
    
    
    
    
    
    
    18,8000.37
    June 30, 2019
    
    
    
    
    56,400
    
    
    
    
    
    
    
    
    56,4000.40
    June 30, 2019
    
    
    
    
    225,600
    
    
    
    
    
    
    
    
    225,6000.37
    March 10, 2021
    
    
    
    
    9,400
    
    
    
    
    
    
    
    
    9,4000.40
    March 10, 2021
    
    
    
    
    150,400
    
    
    
    
    
    
    
    
    150,4000.37
    December 15, 2021
    
    
    
    
    37,600
    
    
    
    
    
    
    
    
    37,6000.40
    December 12, 2022
    
    
    
    
    75,200
    
    
    
    
    
    
    
    
    75,2000.29
    December 8, 2024
    
    
    
    
    37,600
    
    
    
    
    
    
    
    
    37,600Total3
    
    
    
    
    
    4,394,500
    
    
    
    
    
    (3,224,200
    )
    
    1,170,300Warrants and options issued pursuant to the acquisition
      of Mission Gold20.55
    July 9, 2020
    
    
    
    
    13,801,672
    
    
    
    
    
    
    
    
    13,801,6723.00
    September 14, 2017
    
    
    
    
    2,871,676
    
    
    
    
    
    
    
    
    2,871,676Total
    
    
    
    
    
    16,673,348
    
    
    
    
    
    
    
    
    16,673,348Grand Total
    
    
    27,622,642
    
    
    67,007,941
    
    
    (73,562,735
    )
    
    (3,224,200
    )
    
    17,843,648


Notes to the 2015 table:

| | 1. | In the year ended December 31, 2015, the Group completed
      two private placement financings of share purchase warrants ("Special
      Warrants"). Each of the Special Warrants was convertible, without payment
      of any additional consideration by the holder, into one common share of
      the Company, either at the option of the holder or automatically within a
      maximum of a two year period from the issuance date. The Special Warrants
      issued were all converted into common shares by the end of the year. The
      Group incurred a total of $1,112 in advisory, finders, regulatory, and
      legal fees on the financing.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page |24

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

| | 2. | The Group exchanged options and warrants to purchase
      shares in Cannon Point Resources Ltd. ("Cannon Point") and warrants to
      purchase shares in Mission Gold Ltd. ("Mission Gold") for options and
      warrants to purchase shares in the Company pursuant to the acquisition of
      Cannon Point in October 2015 and Mission Gold in December 2015
      respectively. The options and warrants were recognized at their relative
      fair values.    
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 3. | The ending number of options outstanding has been changed
      from the number that was reported in the year ended December 31, 2015, in
      order to correct an immaterial disclosure error in which these options
      were erroneously shown as having been exercised but were still
      outstanding. Accordingly, the total number of options and warrants
      outstanding at December 31, 2015 increased by 18,800 from what was
      previously reported.

|(d) | 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 "2014 Rolling Option Plan") is based on the maximum
      number of eligible shares equaling a rolling percentage of up to 10% of
      the Company's outstanding common shares including any issuances from the
      Groups RSU and DSU plans, calculated from time to time. Pursuant to the
      2014 Rolling Option Plan, if outstanding share purchase options
      ("options") are exercised and the number of issued and outstanding common
      shares of the Company increases, then the options available to grant under
      the plan increase proportionately (assuming there are no issuances under
      the RSU and DSU plans). The exercise price of each 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. Options can have a maximum term of five years
      and typically terminate 90 days following the termination of the
      optionees employment or engagement. In the case of death or retirement,
      any outstanding vested options will expire the earlier of the expiry date
      or one year from date of death or retirement. The vesting period for
      options is at the discretion of the Board of Directors at the time the
      options are granted.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The following summarizes the Groups options outstanding
      at the beginning and end of the year:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |                             |  | 2016       |   |  | 2015       | 
| | --------------------------- |  | ---------- | - |  | ---------- | 
| |                             |  |            |   |  | Weighted   | 
| |                             |  |            |   |  | average    | 
| |                             |  |            |   |  | exercise   | 
| |                             |  | Number of  |   |  | price      | 
| | Continuity of
      options |  | options    |   |  | ($/option) | 
| | Beginning balance           |  | 9,755,600  |   |  | 1.27       | 
| | Granted                     |  | 6,806,000  |   |  | 0.49       | 
| | Expired                     |  | (27,000    | ) |  | 15.44      | 
| | Exercised                   |  | (548,869   | ) |  | 0.92       | 
| | Forfeited                   |  | (38,000    | ) |  | 0.50       | 
| | Cancelled                   |  | (86,600    | ) |  | 1.40       | 
| | Ending balance              |  | 15,861,131 |   |  | 0.92       | 

During the year ended December 31,
2016, the Group granted 200,000 options to consultants for engineering advisory
and administrative consulting services. The Group determined that given the
nature of the services being provided and that are continued 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 approximated the fair value
of the options granted measured using the Black-Scholes option pricing model
which at December 31, 2016 amounted to $144 (2015  $11).

Page |25

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

For options granted in the year ended
December 31, 2016, the weighted average fair value was estimated at $0.46 (2015
 $0.28) per option and was based on the Black-Scholes option pricing model
using the following weighted average assumptions:

Assumptions
    
    2016
    
    
    2015Risk-free interest rate
    
    0.54%
    
    
    0.78%Expected life
    
    4.73 years
    
    
    4.36 yearsExpected volatility 1
    
    82.89%
    
    
    81.76%Grant date share price
    $
    0.67
    
    $
    0.47Expected dividend
      yield
    
    Nil
    
    
    Nil


Note:

| | 1. | Expected volatility is based on the historical volatility
      of the Companys common share price on the TSX.
| | -- | ---------------------------------------------------------------------------------------------------------------

Details of options exercised during the
year ended December 31, 2016 were as follows:

| |                         |  |                   |  |  | Weighted average |  |  | Weighted average   | 
| | ----------------------- |  | ----------------- |  |  | ---------------- |  |  | ------------------ | 
| |                         |  | Share purchase    |  |  | exercise price   |  |  | market share price | 
| | Period                  |  | options exercised |  |  | ($/option)       |  |  | on exercise ($)    | 
| | August 31, 2016         |  | 10,000            |  |  | 0.49             |  |  | 0.96               | 
| | September 1 to 30, 2016 |  | 46,667            |  |  | 0.50             |  |  | 1.00               | 
| | October 24, 2016        |  | 60,000            |  |  | 0.50             |  |  | 0.97               | 
| | November 1 to 30, 2016  |  | 271,668           |  |  | 1.20             |  |  | 1.56               | 
| | December 1 to 31, 2016  |  | 160,534           |  |  | 0.74             |  |  | 2.44               | 
| |                         |  | 548,869           |  |  | 0.92             |  |  | 1.70               | 

No options were exercised in the year
ended December 31, 2015.

The following summarizes information on
options outstanding at December 31, 2016 and 2015:

2016
    
    Options outstanding
    
    
    Options exercisableWeightedWeighted
    
    
    Weighted
    
    
    
    
    
    
    
    
    averageaverage
    
    
    
    
    
    Weighted
    
    
    remainingaverage
    
    
    remaining
    
    
    
    
    
    averageexercise
    
    
    contractual
    
    
    
    
    
    exercise
    
    
    contractualExercise
    
    Number
    
    
    price
    
    
    life
    
    
    Number
    
    
    price
    
    
    lifeprices ($)
    
    outstanding
    
    
    ($/option)
    
    
    (years)
    
    
    outstanding
    
    
    ($/option)
    
    
    (years)0.48
    
    600,000
    
    
    0.48
    
    
    4.21
    
    
    200,000
    
    
    0.48
    
    
    4.210.49
    
    6,147,000
    
    
    0.49
    
    
    4.25
    
    
    2,009,670
    
    
    0.49
    
    
    4.280.50
    
    3,266,831
    
    
    0.50
    
    
    3.23
    
    
    2,074,676
    
    
    0.50
    
    
    3.270.72
    
    200,000
    
    
    0.72
    
    
    2.71
    
    
    200,000
    
    
    0.72
    
    
    2.710.89
    
    1,180,500
    
    
    0.89
    
    
    2.20
    
    
    1,113,498
    
    
    0.89
    
    
    2.221.77
    
    3,991,800
    
    
    1.77
    
    
    1.71
    
    
    3,991,800
    
    
    1.77
    
    
    1.713.00
    
    475,000
    
    
    3.00
    
    
    0.49
    
    
    475,000
    
    
    3.00
    
    
    0.4915,861,131
    
    
    0.92
    
    
    3.11
    
    
    10,064,644
    
    
    1.17
    
    
    2.61


Page |26

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

2015
    
    Options outstanding
    
    
    Options exercisableWeightedWeighted
    
    
    
    
    
    
    
    
    averageWeighted
    
    
    average
    
    
    
    
    
    Weighted
    
    
    remainingaverage
    
    
    remaining
    
    
    
    
    
    averageexercise
    
    
    contractual
    
    
    
    
    
    exercise
    
    
    contractualExercise
    
    Number
    
    
    price
    
    
    life
    
    
    Number
    
    
    price
    
    
    lifeprices ($)
    
    outstanding
    
    
    ($/option)
    
    
    (years)
    
    
    outstanding
    
    
    ($/option)
    
    
    (years)0.50
    
    3,639,500
    
    
    0.50
    
    
    4.15
    
    
    1,217,172
    
    
    0.50
    
    
    4.150.72
    
    200,000
    
    
    0.72
    
    
    3.71
    
    
    133,334
    
    
    0.72
    
    
    3.710.89
    
    1,180,500
    
    
    0.89
    
    
    3.20
    
    
    745,166
    
    
    0.89
    
    
    3.221.77
    
    4,233,600
    
    
    1.77
    
    
    2.70
    
    
    4,233,600
    
    
    1.77
    
    
    2.703.00
    
    475,000
    
    
    3.00
    
    
    1.50
    
    
    475,000
    
    
    3.00
    
    
    1.5015.44
    
    27,000
    
    
    15.44
    
    
    0.21
    
    
    27,000
    
    
    15.44
    
    
    0.219,755,600
    
    
    1.27
    
    
    3.26
    
    
    6,831,272
    
    
    1.57
    
    
    2.94


|(e) | Deferred Share Units ("DSUs")                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Group has a DSU plan which was approved by the
      Groups shareholders in 2015 which allows the Board, at its discretion, to
      award DSUs to non-executive directors for services rendered to the Group
      and also provides that non-executive directors may elect to receive up to
      100% of their annual compensation in DSUs. The aggregate number of DSUs
      outstanding pursuant to the DSU plan may not exceed 2% of the issued and
      outstanding common shares ("Shares") from time to time provided the total
      does not result in the total Shares issuable under all the Groups
      share-based compensation plans (i.e. including Share purchase option and
      RSU plans) exceeding 10% of the total number of issued outstanding Shares.
      DSUs are payable when the non-executive director ceases to be a director
      including in the event of death. DSUs may be settled in Shares issued from
      treasury, by the delivery to the former director of Shares purchased by
      the Group in the open market, payment in cash, or any combination thereof,
      at the discretion of the Group.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | During the year ended December 31, 2016, the Group
      granted 458,129 DSUs with an aggregate fair value of $316 at date of grant
      which was recorded as share-based compensation in the statement of loss
      with a corresponding increase in the equity-settled share payment reserve
      in equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(f) | Restricted Share Units ("RSUs")                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Groups RSU plan which was approved by the Groups
      shareholders, allows the Board to grant employees, executive directors and
      consultants RSUs from time to time. The RSUs are granted conditionally and
      entitle the recipient to receive one share (or the cash equivalent) upon
      attainment of a time-based vesting period. The RSU plan limits the
      aggregate number of RSUs outstanding to 3% of the issued and outstanding
      Shares from time to time provided the total does not result in the total
      Shares issuable under all the Groups share-based compensation plans (i.e.
      including Share purchase option and RSU plans) exceeding 10% of the total
      number of issued outstanding Shares. RSUs can be settled by the Group at
      its discretion in Shares issued from treasury, by the delivery of Shares
      purchased by the Group in the open market, payment in cash or in any
      combination thereof.                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | During the year ended December 31, 2016, the Group
      granted an aggregate 639,031 RSUs to its Chairman, Chief Executive Officer
      and Chief Financial Officer with a vesting term of one year from the date
      of grant. The fair value of the RSUs at date of grant was $441 determined
      using the quoted market price of Shares at date of grant. The Group has
      recognized $209 during the year as share-based compensation with a
      corresponding increase in the equity-settled share payment reserve in
      equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Page |27

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

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

| |                                                          |   | Year
      ended December 31 |  
| | -------------------------------------------------------- | - | ---------------------------- | -
| |                                                          |   | 2016                         |  
| | Beginning balance                                        | $ | 40,479                       |  
| | Foreign exchange translation differences incurred:       |   |                              |  
| | (Loss) gain on
      translation of foreign subsidiaries |   | (4,246                       | )
| | Ending balance                                           | $ | 36,233                       |  

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

|8. | RELATED
PARTY BALANCES AND TRANSACTIONS
|-- | ---------------------------------------

Balances and transactions between the
Company and its subsidiaries, which are related parties of the Company, have
been eliminated on consolidation (note 2(c)). Details between the Group and
other related parties are disclosed below:

|(a) | Transactions and
Balances with Key Management Personnel ("KMP")
|--- | ---------------------------------------------------------------

The aggregate value of transactions
with KMP, being the Groups directors, Chief Financial Officer ("CFO") and
senior management including the Senior Vice President ("VP") Corporate
Development, VP Corporate Communications, VP Engineering, VP Public Affairs,
Chief Executive Officer of the Pebble Partnership ("PLP CEO"), Chairman of
Pebble Mines Corp ("PMC Chair"), Senior VP Corporate Affairs of the Pebble
Partnership ("PLP Senior VP") and Company Secretary, was as follows for the year
ended December 31, 2016 and 2015:

| | Transactions                                                     |   | 2016  |  |   | 2015  |  
| | ---------------------------------------------------------------- | - | ----- |  | - | ----- | -
| | Compensation                                                     |   |       |  |   |       |  
| | Amounts paid to HDSI for services of
      KMP employed by HDSI1 | $ | 2,274 |  | $ | 2,800 |  
| | Amounts paid and payable to KMP2,3                               |   | 1,737 |  |   | 2,700 |  
| |                                                                  |   | 4,011 |  |   | 5,500 |  
| | Share-based compensation 3,4                                     |   | 2,428 |  |   | 500   |  
| | Total
      compensation                                         | $ | 6,439 |  | $ | 6,000 |  
| |                                                                  |   |       |  |   |       |  
| | Transfer of
      resources to the Group5                        | $ |      |  | $ | (364  | )

Notes:

| | 1. | The Groups Chairman, CEO, CFO and senior management
      (other than disclosed in 2 below) are employed by the Group through Hunter
      Dickinson Services Inc. (refer (b) below).                                           
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | The Group directly employs its non-executive directors,
      PLP CEO, PMC Chair and PLP Senior VP. Payments represent short term
      employee benefits incurred, including salaries and directors
  fees.                     
| | 3. | Includes the cost of DSUs issued to non-executive
      directors for annual compensation payable (note 7(e)) and RSUs issued to
      the Groups Chairman, CEO and CFO (note 7(f)) in the current
  year.                      
| | 4. | Includes cost of options granted during the year and
      options still vesting from prior grants.                                                                                                                              
| | 5. | During the year ended December 31, 2015, three directors
      and officers and spouses of officers subscribed and paid for 912,336
      Special Warrants pursuant to the private placement of Special Warrants
    (note 7(c)).

Page |28

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|(b) | Transactions and Balances with other Related
      Parties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Hunter Dickinson Services Inc. ("HDSI") is a private
      company that provides geological, engineering, environmental, corporate
      development, financial, administrative and management services to the
      Group and its subsidiaries at annually set rates pursuant to a management
      services agreement. The annually set rates also include a component of
      overhead costs such as office rent, information technology services and
      general administrative support services. HDSI also incurs third party
      costs on behalf of the Group which are reimbursed by the Group at cost.
      Several directors and other key management personnel of HDSI, who are
      close business associates, are also key management personnel of the
      Group.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | For the year ended December 31, 2016, and 2015, the
      aggregate value of transactions were as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| | Transactions                                                                          |   | 2016  |  |   | 2015  |  
| | ------------------------------------------------------------------------------------- | - | ----- |  | - | ----- | -
| |                                                                                       |   |       |  |   |       |  
| | Services rendered by HDSI:                                                            | $ | 3,584 |  | $ | 4,680 |  
| | Technical                                                                             |   | 1,157 |  |   | 1,600 |  
| | Engineering                                                                           |   | 83    |  |   | 140   |  
| | Environmental                                                                         |   | 375   |  |   | 580   |  
| | Socioeconomic                                                                         |   | 660   |  |   | 670   |  
| | Other technical services                                                              |   | 39    |  |   | 210   |  
| | General and administrative                                                            |   | 2,427 |  |   | 3,080 |  
| | Management, corporate
      communications, secretarial, financial and administration |   | 1,908 |  |   | 2,420 |  
| | Shareholder communication                                                             |   | 519   |  |   | 660   |  
| | Reimbursement of third party expenses incurred by HDSI                                |   | 499   |  |   | 610   |  
| | Conferences and travel                                                                |   | 175   |  |   | 160   |  
| | Insurance                                                                             |   | 54    |  |   | 60    |  
| | Office supplies and information technology                                            |   | 270   |  |   | 390   |  
| |                                                                                       |   |       |  |   |       |  
| | Sale of
      available-for-sale financial assets to HDSI                             |   |      |  |   | (280  | )
| |                                                                                       |   |       |  |   |       |  
| | Total value of
      transactions with HDSI                                           | $ | 4,083 |  | $ | 5,010 |  

The outstanding balances with HDSI were
as follows

| |                                                                          |   | December 31 |  |   | December 31 | 
| | ------------------------------------------------------------------------ | - | ----------- |  | - | ----------- | 
| | Balances
      payable to HDSI                                           |   | 2016        |  |   | 2015        | 
| | Services rendered
      to the Group and expenses incurred for the Group | $ | 240         |  | $ | 677         | 

|9. | TRADE AND OTHER
PAYABLES
|-- | ------------------------

| |                                   |   | December 31 |  |   | December 31 | 
| | --------------------------------- | - | ----------- |  | - | ----------- | 
| | Falling due
      within the year |   | 2016        |  |   | 2015        | 
| | Trade                             | $ | 1,260       |  | $ | 1,594       | 
| | Other (note 6(b))                 |   |            |  |   | 453         | 
| | Total                             | $ | 1,260       |  | $ | 2,047       | 

Page |29

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|10. | BASIC AND DILUTED LOSS PER SHARE                                                                                                       
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                        
|    | The calculation of basic and diluted loss per share was
      based on the following for the year ended December 31, 2016 and
    2015:

| |                                                                   |   | Year
      ended December 31 | 
| | ----------------------------------------------------------------- | - | ---------------------------- | 
| |                                                                   |   | 2016                         | 
| | Loss attributable to common shareholders                          | $ | 26,982                       | 
| | Weighted average
      number of common shares outstanding (000s) |   | 246,161                      | 

|    | Diluted loss per share does not include the effect of
      15,861,131 (2015  9,755,600) employee share purchase options outstanding
      and 54,003,284 (2015  17,843,648) non-employee share purchase options and
      warrants as they are anti-dilutive.                 
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                  
|11. | EMPLOYMENT COSTS                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                  
|    | During the year ended December 31, 2016, the Group
      recorded $10,626 (2015  $9,900) in salaries and benefits, including
      share-based payments of $2,995 (2015  $903) and amounts paid to HDSI for
      services provided to the Group by HDSI personnel (note 8(b)).
|    |                                                                                                                                                                                                                                                                                  
|12. | INCOME TAX
EXPENSE                                                                                                                                                                                                                                                               

| |                                              |   | Year
      ended December 31 | 
| | -------------------------------------------- | - | ---------------------------- | 
| |                                              |   | 2016                         | 
| | Current tax (recovery) expense               |   |                              | 
| |                                              |   |                              | 
| | Current year
      (recovery) expense        | $ |                             | 
| | Current income tax
      (recovery) expense  | $ |                             | 
| |                                              |   |                              | 
| | Deferred income tax (recovery) expense       |   |                              | 
| |                                              |   |                              | 
| | Current year
      (recovery) expense        | $ |                             | 
| | Deferred income
      tax (recovery) expense | $ |                             | 

| |                                                  |   | Year
      ended December 31 |  
| | ------------------------------------------------ | - | ---------------------------- | -
| | Reconciliation
      of effective tax rate       |   | 2016                         |  
| |                                                  |   |                              |  
| | Net loss                                         | $ | (26,982                      | )
| | Total income tax
      (recovery) expense        |   |                             |  
| | Loss excluding
      income tax                  |   | (26,982                      | )
| | Income tax using the Company's domestic tax rate |   | (7,015                       | )
| | Non-deductible expenses (recoveries) and other   |   | 512                          |  
| | Deferred income
      tax assets not recognized  |   | 6,503                        |  
| |                                                  | $ |                             |  

Page |30

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

The Company's domestic tax rate for the
year was 26% (2015  26%).

| |                                                    |   | December 31 |   |   | December 31 |  
| | -------------------------------------------------- | - | ----------- | - | - | ----------- | -
| | Deferred income
      tax assets (liabilities)     |   | 2016        |   |   | 2015        |  
| | Tax losses                                         | $ | 3,214       |   | $ | 3,117       |  
| | Net deferred income tax assets                     |   | 3,214       |   |   | 3,117       |  
| | Resource property/investment in Pebble Partnership |   | (3,191      | ) |   | (3,005      | )
| | Equipment                                          |   | (23         | ) |   | (112        | )
| | Net deferred
      income tax liability            | $ |            |   | $ |            |  

The Group had the following temporary
differences at December 31, 2016 in respect of which no deferred tax asset has
been recognized:

| |                   |   |                  |  |   | Resource |  |   |       | 
| | ----------------- | - | ---------------- |  | - | -------- |  | - | ----- | 
| | Expiry            |   | Tax
      losses |  |   | pools    |  |   | Other | 
| | Within one year   | $ |                 |  | $ |         |  | $ |      | 
| | One to five years |   |                 |  |   |         |  |   | 3,342 | 
| | After five years  |   | 109,116          |  |   |         |  |   |      | 
| | No expiry date    |   | 78               |  |   | 101,325  |  |   | 146   | 
| |                   |   |                  |  |   |          |  | $ |       | 
| | Total             | $ | 109,194          |  | $ | 101,325  |  |   | 3,488 | 

|    | The Group has taxable temporary differences in relation
      to investments in foreign subsidiaries or branches of $7.8 million (2015 
      $7.3 million) which was not recognized because the Group controls the
      reversal of liabilities and it is expected it will not reverse in the
      foreseeable future.                                                                      
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|13. | 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:

|(a) | 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, restricted
      cash ($nil at December 31, 2016) and amounts receivable. The Group limits
      the exposure to credit risk by only investing its cash and cash
      equivalents and restricted cash 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. Amounts receivable (note 5) include
      receivable balances with government agencies and refundable deposits. The
      following is the Groups maximum exposure:

Page |31

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

| |                                 |   | December 31 |  |   | December 31 | 
| | ------------------------------- | - | ----------- |  | - | ----------- | 
| |                                 |   | 2016        |  |   | 2015        | 
| | Amounts receivable              | $ | 679         |  | $ | 1,075       | 
| | Restricted cash                 |   |            |  |   | 453         | 
| | Cash
      and cash equivalents |   | 7,196       |  |   | 7,509       | 
| | Total exposure                  | $ | 7,875       |  | $ | 9,037       | 

|(b) | Liquidity Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Liquidity risk is the risk that the Group will not be
      able to meet its financial obligations when they become due. The Group
      ensures, as far as reasonably possible, it will have sufficient capital in
      order to meet short to medium term business requirements, after taking
      into account cash flows from operations and the Groups holdings of cash
      and cash equivalents and restricted cash ($nil at December 31, 2016),
      where applicable. The Groups cash and cash equivalents at the reporting
      date were currently invested in business accounts.                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Groups financial liabilities are comprised of trade
      and other payables (note 9) and a payable to a related party (note 8(b)),
      which are due for payment within 12 months from the reporting date. The
      carrying amounts of the Groups financial liabilities represent the
      Groups contractual obligations.                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(c) | Foreign exchange risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company is subject to both currency transaction risk
      and currency translation risk: the Pebble Partnership and U5 Resources
      Inc. have the US dollar as functional currency, and certain of the
      Companys corporate expenses are incurred in US dollars. 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 as well as 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

The exposure of the Group's US dollar-
denominated financial assets and liabilities to foreign exchange risk is as
follows:

| |                                                             |   | December 31 |   |   | December 31 |  
| | ----------------------------------------------------------- | - | ----------- | - | - | ----------- | -
| |                                                             |   | 2016        |   |   | 2015        |  
| | Financial assets:                                           |   |             |   |   |             |  
| | Amounts receivable                                          | $ | 326         |   | $ | 595         |  
| | Cash and cash equivalents and restricted cash               |   | 2,232       |   |   | 6,408       |  
| |                                                             |   | 2,558       |   |   | 7,003       |  
| | Financial
      liabilities: Trade and other payables       |   | (652        | ) |   | (1,529      | )
| | Net financial
      assets exposed to foreign currency risk | $ | 1,906       |   | $ | 5,474       |  

|    | Based on the above net exposures and assuming that all
      other variables remain constant, a 10% change in the value of the Canadian
      dollar relative to the US dollar would result in a gain or loss of $191
      (2015  $502) in the year. This sensitivity analysis includes only
      outstanding foreign currency denominated monetary items.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                              
|(d) | Interest rate risk                                                                                                                                                                                                                                                                                                                                           

Page |32

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|    | The Group is subject to interest rate cash flow 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 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 loss of $73 (2015:
      $85).                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(e) | 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, reserves and Special Warrants, 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.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(f) | Fair value                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The fair value of the Groups financial assets and
      liabilities approximates the carrying amount. The fair value of the AFS
      financial asset was classified into level 1 of the fair value hierarchy as
      quoted market prices was used in the fair value
      determination.                                                                                                                                                                                                               

|14. | COMMITMENTS AND
  CONTINGENCIES
|--- | -------------------------------

|(a) | Leases                                                                
|--- | ----------------------------------------------------------------------
|    |                                                                       
|    | The Group has the following commitments as of December
      31, 2016:

| |                             |     | Fiscal  |  |     | Fiscal  |  |     | Fiscal  |  |     |         | 
| | --------------------------- | --- | ------- |  | --- | ------- |  | --- | ------- |  | --- | ------- | 
| |                             |     | 2017    |  |     | 2018    |  |     | 2019    |  |     | Total   | 
| |                             |     | (000s) |  |     | (000s) |  |     | (000s) |  |     | (000s) | 
| | Anchorage office lease1     | US$ | 88      |  | US$ | 91      |  | US$ | 94      |  | US$ | 273     | 
| | Pebble Project site leases2 |     | 56      |  |     |        |  |     |        |  |     | 56      | 
| | Total                       | US$ | 144     |  | US$ | 91      |  | US$ | 94      |  | US$ | 329     | 
| | Total in Canadian dollars3  | $   | 193     |  | $   | 122     |  | $   | 126     |  | $   | 441     | 

Notes:

| | 1. | The initial 5 year lease term expired on October 31,
      2016. The Group negotiated for new office space from November 1, 2016 with
      an initial 5 year term to November 30, 2021.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | The Group has leases for a hangar at site and core
      storage. The hanger lease expires May 1, 2017 and the core yard lease
      expires June 1, 2017.                              
| | 3. | Converted at the closing Bank of Canada rate of $1.3427
      per US$1 on December 31, 2016.                                                                                            

|(b) | Legal                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The Group, through the Pebble Partnership, is advancing
      its multi-dimensional strategy to address the EPAs preemptive regulatory
      action under Section 404(c) of the Clean Water Act, through litigation
      against the EPA contesting the EPAs statutory authority to act
      pre-emptively under the Clean Water Act, and alleging violation of FACA
      and the unlawful withholding of documentation under FOIA (refer note 1).
      The Group has a contingent liability for additional legal fees and costs
      that may be due to the Groups counsel should there be a successful
      outcome or settlement. However, the Group is unable to estimate or
      determine the length of time that each of the legal initiatives mentioned
      above will take to advance to specific milestone events or final
      conclusion. As of the reporting date, if there was a favourable outcome or
      settlement, the Company estimates there would potentially be additional
      legal fees of approximately $20.2 million (US$15.1 million converted at
      the closing Bank of Canada rate on December 31, 2016 of $1.3427 per US$1)
payable by the Group.

Page |33

---

|Northern Dynasty
      Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2016 and 2015                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)
|                                                                                                             

|15. | EVENTS AFTER THE REPORTING DATE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | In January 2017, the Company completed a bought deal
      financing of 20,240,000 common shares at a price of US$1.85 per common
      share for gross proceeds of US$37.4 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | On February 14, 2017, short seller investment firm
      Kerrisdale Capital Management LLC published a negative piece (the
      "Kerrisdale Report") regarding the Pebble Project, which the Company is
      attempting to develop. On February 15 and 17, 2017, two purported
      shareholder class actions were filed against the Company and certain of
      its current officers and directors in US federal courts, specifically the
      Central District of California (Los Angeles) and the Southern District of
      New York (New York City). The cases are captioned: Diaz v. Northern
      Dynasty Minerals Ltd. et al, Case No. 17-cv-01241 (C.D. Cal.)and
      Kirwin v. Northern Dynasty Minerals Ltd. et al, Case No. 17-cv-01238
      (S.D.N.Y.). The complaints appear to rely on the claims made in the
      Kerrisdale Report and allege damages to a class of investors who purchased
      shares of the Company prior to the publication of the Kerrisdale Report
      and allege liability for losses pursuant to Section 10(b) of the Exchange Act of
1934 and SEC Rule 10b-5 thereunder, as well as control person liability against
the individual defendants pursuant to Section 20(a) of the Exchange Act. The
Company has not yet been served with either of these complaints, but has seen
them and assessed their substance. The Company believes that the allegations in
these complaints are without merit, and it intends to defend itself vigorously
against these actions.

Page |34

---