---





CONSOLIDATED FINANCIAL STATEMENTS



FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011



(Expressed in thousands of Canadian Dollars)

---

| | 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 Chartered
Accountants

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

We have audited the accompanying consolidated financial
statements of Northern Dynasty Minerals Ltd. and subsidiaries (the "Company"),
which comprise the consolidated statements of financial position as at December
31, 2012 and December 31, 2011, and the consolidated statements of comprehensive
loss, consolidated statements of cash flows, and consolidated statements of
changes in equity for the years ended December 31, 2012 and December 31,2011,
and a summary of significant accounting policies and other explanatory
information.

Management's Responsibility for the Consolidated Financial
Statements

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

Auditors Responsibility

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

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

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

---

Opinion

In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of Northern Dynasty
Minerals Ltd. and subsidiaries as at December 31, 2012 and December 31, 2011 and
their financial performance and cash flows for the years ended December 31, 2012
and December 31, 2011 in accordance with International Financial Reporting
Standards as issued by the Intema1ional Accounting Standards Board.

Other Matter

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the Company's
internal control over financial reporting as of December 31, 2012, based on the
criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 27, 2013 expressed an unqualified opinion on the Company's
internal control over financial reporting.

(Signed) Deloitte LLP

Independent Registered Chartered Accountants March 27, 2013

---

| | 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 Chartered
  Accountants

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

We have audited the internal control over financial reporting
  of Northern Dynasty Minerals Ltd. and subsidiaries (the "Company") as of
  December 31, 2012, based on the criteria established in Internal Control -
    Integrated Frameworkissued by the Committee of Sponsoring Organizations of
  the Treadway Commission. The Company's management is responsible for maintaining
  effective internal control over financial reporting and for its assessment of
  the effectiveness of internal control over financial reporting, included in the
  accompanying Management's Report on Internal Control over Financial Reporting.
  Our responsibility is to express an opinion on the Company's internal control
  over financial reporting based on our audit.

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

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

---

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

In our opinion, the Company maintained, in all material
  respects, effective internal control over financial reporting as of December 31,
  2012, based on the criteria established in Internal Control - Integrated
    Framework issued by the Committee of Sponsoring Organizations of the
  Treadway Commission.

We have also audited, in accordance with Canadian generally
  accepted auditing standards and the standards of the Public Company Accounting
  Oversight Board (United States), the consolidated financial statements as at and
  for the year ended December 31, 2012 of the Company and our report dated March
  27, 2013 expressed an unqualified opinion on those financial statements.

(Signed) Deloitte LLP

Independent Registered Chartered Accountants 
  March 27, 2013

---

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

|                                              |  |       |  |   | December
      31 |   |   | December
      31 |  
|--------------------------------------------- |  | ----- |  | - | ----------------- | - | - | ----------------- | -
|                                              |  | Notes |  |   | 2012              |   |   | 2011              |  
|                                              |  |       |  |   |                   |   |   |                   |  
|ASSETS                                        |  |       |  |   |                   |   |   |                   |  
|                                              |  |       |  |   |                   |   |   |                   |  
|Non-current assets                            |  |       |  |   |                   |   |   |                   |  
|Investment in the Pebble Limited Partnership  |  | 3     |  | $ | 99,336            |   | $ | 101,542           |  
|Exploration and evaluation assets             |  | 4     |  |   | 1,055             |   |   | 1,055             |  
|Total non-current assets                      |  |       |  |   | 100,391           |   |   | 102,597           |  
|                                              |  |       |  |   |                   |   |   |                   |  
|Current assets                                |  |       |  |   |                   |   |   |                   |  
|Amounts receivable from a
      related party |  | 8     |  |   | 3                 |   |   | 483               |  
|Amounts receivable and other prepaid expenses |  | 5     |  |   | 5,003             |   |   | 4,704             |  
|Cash and cash equivalents                     |  | 6     |  |   | 27,537            |   |   | 37,457            |  
|Total current
      assets                    |  |       |  |   | 32,543            |   |   | 42,644            |  
|                                              |  |       |  |   |                   |   |   |                   |  
|Total Assets                                  |  |       |  | $ | 132,934           |   | $ | 145,241           |  
|                                              |  |       |  |   |                   |   |   |                   |  
|EQUITY                                        |  |       |  |   |                   |   |   |                   |  
|                                              |  |       |  |   |                   |   |   |                   |  
|Capital and reserves                          |  |       |  |   |                   |   |   |                   |  
|Share capital                                 |  | 7     |  | $ | 389,189           |   | $ | 388,987           |  
|Reserves                                      |  |       |  |   | 51,129            |   |   | 48,132            |  
|Deficit                                       |  |       |  |   | (311,425          | ) |   | (295,763          | )
|Total Equity                                  |  |       |  |   | 128,893           |   |   | 141,356           |  
|                                              |  |       |  |   |                   |   |   |                   |  
|LIABILITIES                                   |  |       |  |   |                   |   |   |                   |  
|                                              |  |       |  |   |                   |   |   |                   |  
|Non-current liabilities                       |  |       |  |   |                   |   |   |                   |  
|Deferred income taxes                         |  | 13    |  |   | 3,632             |   |   | 3,715             |  
|Total non-current liabilties                  |  |       |  |   | 3,632             |   |   | 3,715             |  
|                                              |  |       |  |   |                   |   |   |                   |  
|Current liabilities                           |  |       |  |   |                   |   |   |                   |  
|Payable to a related party                    |  | 8     |  |   | 148               |   |   |                  |  
|Trade
      and other payables                |  | 9     |  |   | 261               |   |   | 170               |  
|Total current liabilities                     |  |       |  |   | 409               |   |   | 170               |  
|                                              |  |       |  |   |                   |   |   |                   |  
|Total Liabilities                             |  |       |  |   | 4,041             |   |   | 3,885             |  
|                                              |  |       |  |   |                   |   |   |                   |  
|Total Equity and Liabilities                  |  |       |  | $ | 132,934           |   | $ | 145,241           |  

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

These consolidated financial statements are authorized for
issue by the Board of Directors on March 27, 2013. They are signed on the
Company's behalf by:

|/s/ Ronald W. Thiessen | /s/ Peter Mitchell
|---------------------- | ------------------
|                       |                   
|Ronald W. Thiessen     | Peter Mitchell    
|Director               | Director          

Page 6

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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     |   | 2012                         |  
|                                                                                                               |           |   |                              |  
|Expenses                                                                                                       |           |   |                              |  
|Exploration and evaluation expenses                                                                            | 11        |   | 4,461                        |  
|General and administrative expenses                                                                            | 11        |   | 6,780                        |  
|Share-based compensation                                                                                       | 7 (b), 11 |   | 5,225                        |  
|Loss from operating activities                                                                                 |           |   | 16,466                       |  
|Foreign exchange loss (gain)                                                                                   |           |   | 83                           |  
|Interest
      income                                                                                          |           |   | (887                         | )
|Loss before tax                                                                                                |           |   | 15,662                       |  
|Income
      tax recovery                                                                                      | 13        |   |                             |  
|Loss for the year                                                                                              |           | $ | 15,662                       |  
|                                                                                                               |           |   |                              |  
|Other comprehensive loss (income)                                                                              |           |   |                              |  
|Unrealized loss on available-for-sale marketable
      securities                                              |           |   |                             |  
|Exchange difference arising
      on translation of investment        
      in the Pebble Limited Partnership | 3, 7 (c)  |   | 2,206                        |  
|Deferred
      income tax on investment                                                                        | 7 (c)     |   | (83                          | )
|Other comprehensive loss (income) for the year                                                                 |           | $ | 2,123                        |  
|                                                                                                               |           |   |                              |  
|Total comprehensive loss for the year                                                                          |           | $ | 17,785                       |  
|                                                                                                               |           |   |                              |  
|Basic and diluted loss per common share                                                                        | 10        | $ | 0.16                         |  

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

Page 7

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

|                                                                           |       |   | Year
      ended December 31 |  
|-------------------------------------------------------------------------- | ----- | - | ---------------------------- | -
|                                                                           | Notes |   | 2012                         |  
|                                                                           |       |   |                              |  
|Cash flows from operating activities                                       |       |   |                              |  
|Loss for the year                                                          |       | $ | (15,662                      | )
|Adjustments for items not affecting
      cash:                            |       |   |                              |  
|Donation of shares                                                         |       |   |                             |  
|Foreign exchange
      loss (gain)                                         |       |   | 93                           |  
|Interest receivable on loan                                                | 5 (a) |   | (442                         | )
|Share-based compensation                                                   |       |   | 5,225                        |  
|                                                                           |       |   | 4,876                        |  
|Changes in non-cash working capital
      items                            |       |   |                              |  
|(Decrease) increase
      in amounts receivable and other prepaid expenses |       |   | 48                           |  
|Decrease (increase)
      in amounts receivable from a related party       |       |   | 480                          |  
|Increase (decrease) in trade and
      other payables                      |       |   | 91                           |  
|Increase (decrease)
      in payable to related party                      |       |   | 148                          |  
|                                                                           |       |   | 767                          |  
|                                                                           |       |   |                              |  
|Interest on cash reallocated to investing activities                       |       |   | (445                         | )
|                                                                           |       |   |                              |  
|Net cash used in operating
      activities                                |       |   | (10,464                      | )
|                                                                           |       |   |                              |  
|Cash flows from investing activities                                       |       |   |                              |  
|Interest received                                                          |       |   | 445                          |  
|Loan
      advanced                                                        | 5 (a) |   |                             |  
|Net cash from investing activities                                         |       |   | 445                          |  
|                                                                           |       |   |                              |  
|Cash flows from financing activity                                         |       |   |                              |  
|Common
      shares issued for cash                                        | 7     |   | 97                           |  
|Net cash from financing activity                                           |       |   | 97                           |  
|                                                                           |       |   |                              |  
|Net decrease in cash and cash equivalents                                  |       |   | (9,922                       | )
|Effect of exchange rate fluctuations on cash held                          |       |   | 2                            |  
|Cash and cash equivalents at beginning of the year                         |       |   | 37,457                       |  
|                                                                           |       |   |                              |  
|Cash and cash equivalents at end of the year                               | 6     | $ | 27,537                       |  

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

Page 8

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NorthernDynasty MineralsLtd.ConsolidatedStatements of Changesin Equity
  (Expressed in thousands of Canadian Dollars, except for
share information)

Share
        capital
      
      
      ReservesForeignEquity settled
      
      
      currencyshare-based
      
      
      translation
      
      
      InvestmentNumber of
      
      
      
      
      
      payments
      
      
      reserve
      
      
      revaluationshares
      
      
      Amount
      
      
      reserve
      
      
      (note
        7
      (c))
      
      reserve
      
      
      Deficit
      
      
      Total equityBalance at January 1, 2011
      
      94,177,066
      
      $
      380,570
      
      $
      34,799
      
      $
      316
      
      $
      (1
      )
      $
      (275,624
      )
      $
      140,060Shares issued for cash on exercise of share purchase options
      
      726,698
      
      
      4,211
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      4,211Fair value of options allocated to shares
        issued on exercise
      
      
      
      
      3,340
      
      
      (3,340
      )
      
      
      
      
      
      
      
      
      
      
      Shares donated
      
      75,000
      
      
      866
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      866Share-based compensation
      
      
      
      
      
      
      
      14,205
      
      
      
      
      
      
      
      
      
      
      
      14,205Loss for the year
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (20,139
      )
      
      (20,139
      )Other comprehensive income for the year net of tax
      
      
      
      
      
      
      
      
      
      
      2,154
      
      
      (1
      )
      
      
      
      
      2,153Balance at December 31, 2011
      
      94,978,764
      
      $
      388,987
      
      $
      45,664
      
      $
      2,470
      
      $
      (2
      )
      $
      (295,763
      )
      $
      141,356Shares issued for cash on exercise of share purchase options
      
      21,000
      
      
      97
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      97Fair value of options allocated to shares
        issued on exercise
      
      
      
      
      105
      
      
      (105
      )
      
      
      
      
      
      
      
      
      
      
      Share-based compensation
      
      
      
      
      
      
      
      5,225
      
      
      
      
      
      
      
      
      
      
      
      5,225Loss for the year
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (15,662
      )
      
      (15,662
      )Other comprehensive
        loss for the year net of tax
      
      
      
      
      
      
      
      
      
      
      (2,123
      )
      
      
      
      
      
      
      
      (2,123
      )Balance at December 31, 2012
      
      94,999,764
      
      $
      389,189
      
      $
      50,784
      
      $
      347
      
      $
      (2
      )
      $
      (311,425
      )
      $
      128,893


Theaccompanyingnotes are anintegralpart of theseconsolidatedfinancialstatements.

Page 9

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|Northern Dynasty Minerals Ltd.                                                                               
|-------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial
      Statements                                                         
|For the years ended December 31, 2012 and 2011                                                               
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated, except per share
      or option)

|1. | NATURE OF OPERATIONS AND CONTINUANCE OF
      OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Northern Dynasty Minerals Ltd. (the "Company") is
      incorporated under the laws of the Province of British Columbia, Canada,
      and its principal business activity is the exploration of mineral
      properties. The Company is listed on the Toronto Stock Exchange ("TSX")
      under the symbol "NDM" and on the New York Stock Exchange-MKT (formerly
      NYSE-AMEX) 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,
      2012, include financial information for the Company and its subsidiaries
      (note 2(c)) (together referred to as the "Group" and individually as
      "Group entities") and the Groups interest in jointly controlled entities.
      The Company is the ultimate parent. The Group owns a 50% share in the
      Pebble Limited Partnership (the "Pebble Partnership") (note 3). The Pebble
      Partnership owns the Pebble Copper-Gold- Molybdenum Project (the "Pebble
      Project"), the Groups principal mineral property interest located in
      Alaska, United States of America ("USA" or "US").                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Group is in the process of exploring 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 investment in the Pebble Partnership is entirely dependent
      upon the existence of economically recoverable mineral reserves; the
      ability of the Group to obtain financing of its share to complete the
      exploration and development of the Pebble Project; the Pebble Partnership
      obtaining the necessary permits to mine; and future profitable production
      or proceeds from the disposition of the investment in the Pebble
      Partnership.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|2. | SIGNIFICANT ACCOUNTING
POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|(a) | Statement of Compliance                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | These Financial Statements have been prepared in
      accordance with International Financial Reporting Standards ("IFRS") as
      issued by the International Accounting Standards Board ("IASB") and
      interpretations issued by the IFRS Interpretations Committee ("IFRIC"s).
      These Financial Statements have been prepared on the basis of IFRS
      standards that are effective for the Groups reporting year ended December
      31, 2012.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(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.                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The accounting policies set out below have been applied
      consistently to all periods presented in these Financial
  Statements.                                                                                                                                                                                                                                                                                                                             

Page 10

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|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

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

| |                               |                          | Ownership |                   
| | ----------------------------- | ------------------------ | --------- | ------------------
| | Name of Subsidiary            | Place of Incorporation   | Interest  | Principal Activity
| | 3537137 Canada Inc.           | Canada                   | 100%      | Holding Group     
| | 0796412 BC Ltd.               | British Columbia, Canada | 100%      | Not active        
| | Northern Dynasty Partnership1 | Alaska, USA              | 100%      | Holding Group     
| | U5 Resources
      Inc.2      | Nevada, USA              | 100%      | Holding Company   

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

|    | The Group has determined that its investment in the
      Pebble Partnership qualifies as an interest in a jointly controlled entity
      under IAS 31, Interests in Joint Ventures("IAS 31") and applies
      the equity method to account for this interest. The investment is carried
      in the statement of financial position at cost and adjusted by
      post-acquisition changes in the Groups share of the net assets of the
      joint venture, less any impairment losses. As the Groups investment is
      carried in US dollars, the investment is translated at the end of each
      reporting period (note 3).                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Intra-Group balances and transactions, including any
      unrealized income and expenses arising from intra- Group transactions, are
      eliminated in 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) | Interests in Joint Ventures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | A joint venture is a contractual arrangement whereby the
      Group and other parties undertake an economic activity that is subject to
      joint control (i.e. when the strategic financial and operating policy
      decisions relating to the activities of the joint venture require the
      unanimous consent of the parties sharing control).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Joint venture arrangements that involve the establishment
      of a separate entity in which each venturer has an interest are referred
      to as jointly controlled entities. The Group reports its interests in a
      jointly controlled entity ("JCE"), under the equity method of accounting,
      except when the investment is classified as held for sale, in which case
      it is accounted for in accordance with IFRS 5, Non-current Assets Held
      for Sale and Discontinued Operations. Under the equity method, the
      Groups interest in the JCE is carried in the consolidated financial
      statement of financial position at cost as adjusted for post-acquisition
      changes in the Groups share of the net assets of the JCE less any
      impairment in the value of the investment. Losses in excess of the Groups
      interest in that JCE are recognized only to the extent that the Group has
      incurred legal or constructive obligations or made payments on behalf of
      the JCE.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Any excess of the cost of the acquisition over the
      Groups share of the fair value of the identifiable assets, liabilities
      and contingent liabilities of the JCE recognized at the date of the
      acquisition is recognized as goodwill. The goodwill is included within the
      carrying amount of the JCE and is assessed for impairment as part of that
      JCE. Any excess of the Groups share of the net fair value of the
      identifiable assets, liabilities and contingent liabilities over the cost
      of acquisition, after reassessment, is recognized immediately in
profit or loss.                                                                                                                                                                                                                                                                                                                                                                                                                   

Page 11

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

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

| |                                  |               | Proportion of |                              
| | -------------------------------- | ------------- | ------------- | -----------------------------
| |                                  | Place of      | Ownership     |                              
| | Name of JCE                      | Incorporation | Interest      | Principal Activity           
| | Pebble Mines Corp.               | Delaware, USA | 50%           | General partner              
| | Pebble Limited
      Partnership | Alaska, USA   | 49.95%1       | Exploration of Pebble Project

| | 1 | Pebble Mines Corp. has a 0.1% ownership interest in the
      Pebble Limited Partnership.
| | - | -----------------------------------------------------------------------------------------

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

Page 12

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

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 currently
comprise amounts receivable including the loan receivable from Liberty Star
(note 5(a)), amounts receivable from a related party and cash and cash
equivalents (see below).

Cash and cash equivalents

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

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

Non-derivative
financial liabilities:

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

All financial liabilities fall within
the classification of other financial liabilities versus financial liabilities
through profit and loss and are recognized initially at fair value net of any
directly attributable transaction costs. Subsequent to initial recognition these
financial liabilities are measured at amortized cost using the effective
interest method.

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.

Page 13

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

|    | For certain categories of financial assets, such as
      amounts receivable, assets that are assessed not to be impaired
      individually are subsequently assessed for impairment on a collective
      basis. The carrying amount of financial assets is reduced by the
      impairment loss directly for all financial assets with the exception of
      amounts receivable, where the carrying amount is reduced through the use
      of an allowance account. When an amount receivable is considered
      uncollectible, it is written off against the allowance account. Subsequent
      recoveries of amounts previously written off are credited against the
      allowance account. Changes in the carrying amount of the allowance account
      are recognized in profit or loss.          
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | With the exception of AFS equity instruments, if, in a
      subsequent period, the amount of the impairment loss decreases and the
      decrease can be related objectively to an event occurring after the
      impairment was recognized, the previously recognized impairment loss is
      reversed through profit or loss to the extent that the carrying amount of
      the investment at the date the impairment is reversed does not exceed what
      the amortized cost would have been had the impairment not been recognized.
      In respect of AFS equity securities, impairment losses previously
      recognized through profit or loss are not reversed through profit or loss.
      Any increase in fair value subsequent to an impairment loss is recognized
      directly in equity.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | When an AFS financial asset is considered to be impaired,
      cumulative gains or losses previously recognized in other comprehensive
      income are reclassified to profit or loss in the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Derivative financial assets and
      liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Group has no derivative financial assets or
      liabilities. Although the loan receivable from Liberty Star has an equity
      conversion option, it is not exercisable as the Group has not meet the
      terms as laid out in the letter agreement (note 5(a)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(g) | Exploration and Evaluation Expenditure                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Exploration and evaluation expenditures include the costs
      of acquiring licenses, costs associated with exploration and evaluation
      activity, and the acquisition date fair value of exploration and
      evaluation assets acquired in a business combination or an asset
      acquisition. Exploration and evaluation expenditures are expensed as
      incurred except for expenditures associated with the acquisition of
      exploration and evaluation assets through a business combination or an
      asset acquisition. Costs incurred before the Group has obtained the legal
      rights to explore an area are expensed.                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Acquisition costs, including general and administrative
      costs, are only capitalized to the extent that these costs can be related
      directly to operational activities in the relevant area of interest where
      it is considered likely to be recoverable by future exploitation or sale
      or where the activities have not reached a stage which permits a
      reasonable assessment of the existence of reserves.                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Exploration and evaluation ("E&E") assets are
      assessed for impairment only when facts and circumstances suggest that the
      carrying amount of an E&E asset may exceed its recoverable amount and
      when the Group has sufficient information to reach a conclusion about
      technical feasibility and commercial viability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Industry-specific indicators for an impairment review
      arise typically when one of the following circumstances
  applies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |  | Substantive expenditure on further exploration and
      evaluation activities is neither budgeted nor planned;
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | title to the asset is compromised;                                                                             

Page 14

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

| |  | adverse changes in the taxation
      and regulatory environment;       
| | - | ------------------------------------------------------------------------
| |  | adverse changes in variations in
      commodity prices and markets; and
| |  | variations in the exchange rate
      for the currency of operation.    

|    | Once the technical feasibility and commercial viability
      of the extraction of mineral resources in an area of interest are
      demonstrable, exploration and evaluation assets attributable to that area
      of interest are first tested for impairment and then reclassified to
      mining property and development assets within property, plant and
      equipment.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                    
|    | Recoverability of the carrying amount of any exploration
      and evaluation assets is dependent on successful development and
      commercial exploitation, or alternatively, sale of the respective areas of
      interest.                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                    
|(h) | Property, Plant and Equipment                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                    
|    | Property, plant and equipment ("PPE") are carried at
      cost, less accumulated depreciation and accumulated impairment
    losses.                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                    
|    | The cost of an item of PPE consists of the purchase
      price, any costs directly attributable to bringing the asset to the
      location and condition necessary for its intended use and an initial
      estimate of the costs of dismantling and removing the item and restoring
      the site on which it is located.                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                    
|    | Depreciation is provided at rates calculated to write off
      the cost of PPE, less their estimated residual value, using the declining
      balance method at various rates ranging from 20% - 30% per
annum.                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                    
|    | An item of PPE is derecognized upon disposal or when no
      future economic benefits are expected to arise from the continued use of
      the asset. Any gain or loss arising on disposal of the asset, determined
      as the difference between the net disposal proceeds and the carrying
      amount of the asset, is recognized in profit or loss.                       
|    |                                                                                                                                                                                                                                                                                                                                                                                    
|    | Where an item of plant and equipment consists of major
      components with different useful lives, the components are accounted for
      as separate items of plant and equipment. Expenditures incurred to replace
      a component of an item of PPE that is accounted for separately, including
      major inspection and overhaul expenditures, are capitalized.          
|    |                                                                                                                                                                                                                                                                                                                                                                                    
|    | Residual values and estimated useful lives are reviewed
      at least annually.                                                                                                                                                                                                                                                                                                   

Page 15

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

|(i) | Impairment of Non-Financial Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | At the end of each reporting period the carrying amounts
      of the Groups assets are reviewed to determine whether there is any
      indication that those assets are impaired. If any such indication exists,
      the recoverable amount of the asset is estimated in order to determine the
      extent of the impairment 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(j) | Share Capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Common shares are classified as equity. Transaction costs
      directly attributable to the issue of common shares and share purchase
      options are recognized as a deduction from equity, net of any tax
      effects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(k) | Share-based Payment Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Equity-settled share-based payments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The Group operates an equity-settled share-based option
      plan for its employees and service providers (note 7(b)). 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 reserve in equity. An individual is classified as an
      employee when the individual is an employee for legal or tax purposes
      ("direct employee") or provides services similar to those performed by a
      direct employee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The fair value is measured at grant date for each tranche
      which is expensed on a straight line basis over the vesting period with a
      corresponding increase in the equity-settled share-based payments
      reservein equity. The fair value of the share purchase options
      granted is measured using the Black-Scholes option pricing model taking
      into account the terms and conditions upon which the share purchase
      options were granted and forfeiture rates as appropriate. At the end of
      each reporting period, the amount recognized as an expense is adjusted to
      reflect the actual number of share purchase options that are expected to
      vest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Page 16

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

|(l) | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Income tax on the profit or loss for the years presented
      comprises current and deferred tax. Income tax is recognized in profit or
      loss except to the extent that it relates to items recognized in other
      comprehensive income or loss or directly in equity, in which case it is
      recognized in other comprehensive income or loss or equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Current tax expense is the expected tax payable on the
      taxable income for the year, using tax rates enacted or substantively
      enacted at year end, adjusted for amendments to tax payable with regards
      to previous years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Deferred tax is provided using the balance sheet
      liability method, providing for unused tax loss 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(m) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Page 17

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

|    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(n) | Loss per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The Group presents basic and diluted loss per share data
      for its common shares, calculated by dividing the loss attributable to
      common shareholders of the Group by the weighted average number of common
      shares outstanding during the period. Diluted loss per share does not
      adjust the loss attributable to common shareholders or the weighted
      average number of common shares outstanding when the effect is
      anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(o) | Segment Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The Group operates in a single reportable operating
      segment  the acquisition, exploration and development of mineral
      properties. The Groups core asset is its interest in the Pebble
      Partnership, whose assets are located in Alaska, USA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(p) | 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 18

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(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:

| | i.   | 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(b).
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ii.  | The loan receivable from Liberty Star Uranium &
      Metals Corp (note 5(a)), which is secured by certain mineral claims, was
      past due at the end of the reporting period however the Group has not
      recognised an allowance for doubtful debts because the Group has a
      reasonable expectation that the loan will be settled by the transfer of
      the underlying mineral claims by the debtor.                                                                                                                                                                                                                                                           
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | iii. | Provision for the deferred income tax expense included in
      the loss for the year (nil for the current year) and the composition of
      deferred income tax liabilities included in the consolidated statements of
      financial position.                                                                                                                                                                                                                                                                                                                                                                                                                             

Critical accounting judgments

These include:

| | i.   | In terms of IFRS 6, Exploration and Evaluation of
      Mineral Resources,the Group used judgment in determining whether
      there are facts and circumstances suggesting that the carrying amount of
      its investment in the Pebble Partnership and the Groups exploration and
      evaluation assets ("E&E assets") may exceed their recoverable amount.
      The Groups E&E assets represent a mineral property interest (note 4)
      in certain mineral claims located to the west of the Pebble
  Project.                                                                                                                                         
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ii.  | IAS 21, The Effects of Changes in Foreign Exchange
      Rates("IAS 21") defines the functional currency as the currency of
      the primary economic environment in which an entity operates. IAS 21
      requires the determination of functional currency to be performed on an
      entity by entity basis, based on various primary and secondary factors. In
      identifying the functional currency of the parent and of its subsidiaries
      and jointly controlled entities, management considered the currency that
      mainly influences the cost of undertaking the business activities in each
      jurisdiction in which the Group operates.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | iii. | The Group used judgment in determining that its
      investment in the Pebble Partnership qualifies as an interest in a jointly
      controlled entity under IAS 31, Interests in Joint Ventures,and
      that the equity method is applicable to account for this
  interest.                                                                                                                                                                                                                                                                                                                                                                                   

Page 19

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

|(q) | Accounting Standards, Amendments and Revised Standards
      Not Yet Effective
|--- | ------------------------------------------------------------------------------

| | (i) | Effective for the Groups financial year commencing on
      January 1, 2013                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | Consolidation, joint arrangements, associates,
      disclosures and other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | In May 2011, the IASB issued new and revised standards on
      consolidation, joint arrangements, associates and disclosures: IFRS 10,
      Consolidated Financial Statements;IFRS 11, Joint
      Arrangements; IFRS 12, Disclosure of Interests in Other Entities;IAS 27, Separate Financial Statements(as revised in 2011) and
      IAS 28, Investments in Associates and Joint Ventures(as revised in
      2011). In June 2011, IAS 1, Presentation of Financial Statements,was amended. In October 2011, IFRIC 20, Stripping Costs in the
      Production Phase of a Surface Mine,was issued. In December 2011, an
      amendment to IFRS 7, Financial Instruments: Disclosuresrelating to
      disclosures around information about rights of offset and related
      arrangements was issued.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | The Group has not early adopted these new or revised
      standards, interpretation and amendments. Based upon its current facts and
      circumstances, the Group does not expect these new and revised standards
      to have a material impact on its consolidated financial statements except
      for change in disclosure and presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | The Pebble Partnership                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | IFRS 11 replaces IAS 31, Interests in Joint Venturesand SIC-13, Jointly Controlled Entities  Non- Monetary
      Contributions by Venturers. Under IFRS 11, an entitys interest in an
      arrangement subject to joint control is classified based on the rights and
      obligations of the parties to the joint arrangement rather than its legal
      form as follows:                                                                                                                                                                                                                                                                                                                                                                                                                             

| |  | A joint operation is a joint arrangement whereby the
      parties that have joint control of the arrangement ("joint operators")
      have rights to the assets and obligations for the liabilities relating to
      the arrangement. IFRS 11 requires that a joint operator recognize its
      portion of assets, liabilities, revenues and expenses of the joint
      arrangement.                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A joint venture is a joint arrangement whereby the
      parties that have joint control of the arrangement ("joint venturers")
      have rights to the net assets of the arrangement, which is determined by
      considering the structure and form of the arrangement, the terms agreed by
      the parties in the contractual arrangement and other facts and
      circumstances. A joint venturer recognizes its investment in a joint
      arrangement using the equity method.

The Groups interest in the Pebble
Partnership was classified as a jointly controlled entity under IAS 31 and was
accounted for using the equity method (note 2(d)). As required under IFRS 11,
the Group has reviewed and assessed the structure and legal form, the terms of
the contractual arrangements, and other facts and circumstances in relation to
its interest in the Pebble Partnership. The Group has concluded that, under IFRS
11, its interest in the Pebble Partnership will be classified as a joint venture
and, hence, will continue to be accounted for under the equity method.

Fair value measurement

In May 2011, the IASB issued IFRS 13,
Fair Value Measurement. This standard defines fair value, sets out a single IFRS
framework for measuring fair value and outlines disclosure requirements about
fair value measurements. IFRS 13 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.

Page 20

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

| |      | Fair value is a market-based
      measurement, not an entity-specific measurement, so assumptions that
      market participants would use should be applied in measuring fair
    value.                                                                                                                                                                                                                                                                                                             
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |      | IFRS 13 is effective for annual periods on or after
      January 1, 2013, with earlier application permitted. This standard is to
      be applied prospectively as of the beginning of the annual period in which
      it is initially applied and the disclosure requirements do not need to be
      applied in comparative periods before initial application. The Group
      anticipates that the application of the new standard may result in more
      extensive disclosures in the future.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | (ii) | Effective for the Groups financial years commencing
      on January 1, 2014 and 2015                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |      | Amendments to IAS 32, Financial Instruments:
      Presentation,issued in December 2011 which clarify existing
      application issues relating to the offset of financial assets and
      financial liabilities requirements applies to annual periods beginning on
      or after January 1, 2014.                                                                                                                                                                                                 
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |      | IFRS 9, Financial Instruments, Classification and
      Measurement, originally issued in November 2009 and reissued in
      October 2010, applies to annual periods beginning on or after January 1,
      2015. IFRS 9 is the first phase of three phases to replace IAS 39,
      Financial Instruments: Recognition and Measurement, in its
      entirety. The Group has not early adopted this standard.                                                                                        
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |      | The Group anticipates that the adoption of the amendments
      and standard will have no material impact on its consolidated financial
      statements given the extent of its use of financial instruments in the
      ordinary course of business.                                                                                                                                                                                                                                                

|3. | INVESTMENT IN THE PEBBLE LIMITED
  PARTNERSHIP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | On July 26, 2007, the Group converted a wholly-owned
      general partnership that held its Pebble Property interest into a limited
      partnership, the Pebble Partnership. Anglo American plc ("Anglo American")
      through a wholly-owned subsidiary subscribed for 50% of the Pebble
      Partnership's equity effective July 31, 2007. The Group (through a
      wholly-owned subsidiary) and Anglo American have equal rights in the
      Pebble Partnership. To maintain its 50% interest in the Pebble
      Partnership, Anglo American is required to commit staged cash investments
      into the Pebble Partnership aggregating to US$1.5 billion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Anglo Americans staged investment requirements include
      an initial minimum expenditure of US$125 million (completed in 2008)
      towards a prefeasibility report. The prefeasibility report is to be
      approved by the Board of the general partner (Pebble Mines Corp.), and is
      to summarize all previous prefeasibility studies. The Board of the general
      partner is also to approve the alternatives for a final feasibility study.
      Anglo American is required, in order to retain its 50% interest in the
      Pebble Partnership, to commit within 90 days of the later of the receipt
      of the approved prefeasibility report and the approved study alternatives,
      to fund further expenditures which would bring its total investment to at
      least US$450 million, which amount is to be expended in producing a final
      feasibility study and in related activities, which is expected to take the
      Pebble Partnership to a production decision. Upon an affirmative decision
      by the Pebble Partnership to develop a mine, Anglo American is required to
      commit to the remaining portion of the total investment of US$1.5 billion
      in order to retain its interest in the Pebble Partnership. Following
      completion of the US$1.5 billion expenditure, any further expenditure will
    be funded by Anglo American and the Group on a 50/50 basis.

Page 21

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|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

To December
      31, 2012, Anglo American has funded US$504 million ($524 million). The Pebble Partnership
agreement provides for equal project control rights for both partners with no
operators fees payable to either party.

The Group has determined that its
investment in the Pebble Partnership qualifies as an interest in a jointly
controlled entity under IAS 31 and applies the equity method in accounting for
this interest. The Group has not recognized any share of the losses in the
Pebble Partnership since inception as the Group has no obligation in respect to
these losses as the agreement with Anglo American states that the distribution
of losses funded by Anglo American are allocated 100% to Anglo American until
the total investment of US$1.5 billion is met. For the year ended December 31,
2012, the Pebble Partnership has incurred losses totaling $102,863 (2011 
$84,517). Cumulative losses since inception of the Pebble Partnership to
December 31, 2012 total $522,110 (2011  $419,247). The accounting policies of
the Pebble Partnership are the same as those followed by the Group. The Groups
investment in the Pebble Partnership is carried in US dollars. Exchange
differences arising from the translation of the Groups investment in the Pebble
Partnership are recognized directly in the foreign currency translation reserve
through other comprehensive loss.

| | Investment in the Pebble Partnership           |   | December 31 |   |   | December 31 | 
| | ---------------------------------------------- | - | ----------- | - | - | ----------- | 
| |                                                |   | 2012        |   |   | 2011        | 
| | Carrying value at the beginning of the year    | $ | 101,542     |   | $ | 99,306      | 
| | Foreign currency
      translation (note 7(c)) |   | (2,206      | ) |   | 2,236       | 
| | Carrying value at the end of the year          | $ | 99,336      |   | $ | 101,542     | 

Summary financial information for the
equity accounted investee on a100% basis is as follows:

| | Assets and Liabilities    |   | December 31 |  |   | December 31 | 
| | ------------------------- | - | ----------- |  | - | ----------- | 
| |                           |   | 2012        |  |   | 2011        | 
| | Non-current assets        | $ | 101,344     |  | $ | 101,311     | 
| | Current assets            |   | 11,890      |  |   | 14,095      | 
| | Total assets              | $ | 113,234     |  | $ | 115,406     | 
| | Current
      liabilities |   | 9,902       |  |   | 10,522      | 
| | Total liabilities         | $ | 9,902       |  | $ | 10,522      | 

| | Losses                |   | Year
      ended December 31 | 
| | --------------------- | - | ---------------------------- | 
| |                       |   | 2012                         | 
| | Net loss for the year | $ | 102,863                      | 
| | Net cumulative losses |   | 522,110                      | 

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

Page 22

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|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

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

| |       |   | December 31 |  |   | December 31 | 
| | ----- | - | ----------- |  | - | ----------- | 
| |       |   | 2012        |  |   | 2011        | 
| | Total | $ | 1,055       |  | $ | 1,055       | 

|   | Pursuant to a letter agreement dated June 29, 2010 with
      Liberty Star Uranium & Metals Corp. and its subsidiary, Big Chunk
      Corp. (together, "Liberty Star"), the Group acquired 60.7 square
      kilometers of mineral claims located to the west of the Pebble Project
      mineral claims in consideration for a US$1,000 ($1,055) cash
    payment.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                    
|5. | AMOUNTS RECEIVABLE AND OTHER PREPAID
    EXPENSES                                                                                                                                                                                                                                                                                                                  

| |                      |   | December 31 |  |   | December 31 | 
| | -------------------- | - | ----------- |  | - | ----------- | 
| |                      |   | 2012        |  |   | 2011        | 
| | Sales tax receivable | $ | 177         |  | $ | 236         | 
| | Loan receivable (a)  |   | 4,639       |  |   | 4,292       | 
| | Prepaid expenses     |   | 187         |  |   | 176         | 
| | Total                | $ | 5,003       |  | $ | 4,704       | 

|(a) | Loan Receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The loan receivable at December 31, 2012 and 2011
      comprised the amount advanced to Liberty Star in cash, expenditures
      incurred by the Group in relation to Liberty Stars mineral claims in
      Alaska and interest accrued thereon (together; the "Loan") pursuant to a
      letter agreement dated June 2010 and subsequent amendments thereof
      (together; the "Letter Agreement"). The Loan is repayable in cash upon
      demand by the Group. The Loan accrues interest at 10% per annum,
      compounded monthly, and is secured by assets and mining claims owned by
      Liberty Star in Alaska, USA.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The principal amount and accrued interest relating to the
      Loan are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                                      |   | December 31 |  |   | December 31 | 
| | ---------------------------------------------------- | - | ----------- |  | - | ----------- | 
| |                                                      |   | 2012        |  |   | 2011        | 
| | Balance of the principal sum:                        |   |             |  |   |             | 
| | Cash advance (US$3,000)                              | $ | 2,985       |  | $ | 3,051       | 
| | Expenses incurred on behalf of Liberty Star (US$730) |   | 726         |  |   | 743         | 
| | Total principal sum receivable at year end           |   | 3,711       |  |   | 3,794       | 
| | Accumulated
      accrued interest at year end       |   | 928         |  |   | 498         | 
| | Balance at end of year                               | $ | 4,639       |  | $ | 4,292       | 

The Loan was advanced in conjunction
with and in anticipation of the acquisition of a mineral property interest,
pursuant to the Letter Agreement, which is summarized as follows:

| | (i) | the Group acquired certain mineral claims from Liberty
      Star outboard of and adjacent to the Pebble Project mineral claims (note
      (4)); and
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------

Page 23

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

| | (ii) | the Group and Liberty Star agreed to enter into a joint
      venture arrangement whereby the Group, subject to a certain earn-in
      expenditure requirement, may acquire 60% interest in certain of Liberty
      Stars mineral claims adjacent to the mineral claims acquired in (i)
      above. Liberty Stars assets held as collateral for the Loan include, but
      are not limited to, these mineral claims. The Letter Agreement provides
      that, in the event of execution of the joint venture agreement, the Group
      at its sole election can deem all or any part of the Loan to constitute
      part of the Groups contribution to the earn-in expenditure requirement or
      can convert the Loan into Liberty Stars common shares upon completion of
      a certain amount of minimum earn-in
expenditure.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|   | As the joint venture agreement contemplated in the Letter
      Agreement was not executed, in October 2012 the Group delivered a notice
      of repayment of the Loan to Liberty Star. In November 2012, the Group and
      Liberty Star negotiated a loan settlement agreement and an amendment
      thereto (together; the Loan Settlement Agreement) whereby the Group
      agreed to extinguish the Loan in consideration for receiving the title to
      certain of the mineral claims owned by Liberty Star and which were held as
      collateral for the Loan. At December 31, 2012 as Liberty Star had not
      completed valid transfer of the claims to the Group in accordance with the
      terms of the Loan Settlement Agreement, the Loan Settlement Agreement had
      not closed and the Group retained all its rights under the Letter
      Agreement. Accordingly, the Group has recognized the Loan as a financial
      asset in these Financial Statements.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The Group believes that, at December 31, 2012, the Loan
      was past due 40 days but was not impaired. The Group has a reasonable
      expectation that it will recover the carrying amount of the Loan by
      enforcing the legal rights conferred by the Letter Agreement and/or the
      Loan Settlement Agreement including, but not limited to, the right to
      receive all or any portion of the mineral claims held as collateral for
      the Loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|6. | CASH AND CASH
EQUIVALENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                          |   | December 31 |  |   | December 31 | 
| | ---------------------------------------- | - | ----------- |  | - | ----------- | 
| |                                          |   | 2012        |  |   | 2011        | 
| | Business and savings accounts            | $ | 5,921       |  | $ | 28,055      | 
| | Guaranteed
      investment certificates |   | 21,616      |  |   | 9,402       | 
| | Total                                    | $ | 27,537      |  | $ | 37,457      | 

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

|(a) | Authorized Share Capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | At December 31, 2012, the authorized share capital
      comprised an unlimited (2011  unlimited) number of common shares with no
      par value. All issued shares are fully paid.                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(b) | Share Purchase Option Compensation Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Group has a share purchase option plan approved by
      the Groups shareholders that allows the Board of Directors to grant share
      purchase options, subject to regulatory terms and approval, to its
      officers, directors, employees, and service providers. The share purchase
      option plan (the "2011 Rolling Option Plan") is based on the maximum
      number of eligible shares equaling a rolling percentage of 10% of the
  Group's outstanding common shares, calculated from time to time.

Page 24

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|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

Pursuant to the 2011 Rolling Option Plan, if outstanding share purchase
options are exercised and the number of issued and outstanding common shares of
the Group increases, then the share purchase options available to grant under
the plan increase proportionately. The exercise price of each share purchase
option is set by the Board of Directors at the time of grant but cannot be less
than the market price, being the 5-day volume weighted average trading price
calculated the day before the grant. Share purchase options can have a maximum
term of ten years (although share purchase options have generally been granted
with terms of three or 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 share purchase options will expire the
earlier of the expiry date or one year from date of death or retirement. The
vesting period for share purchase options is at the discretion of the Board of
Directors at the time the options are granted.

The following reconciles the Groups
share purchase options outstanding at the beginning and end of the year:

| |                                   |  | 2012           |   |  | 2011           | 
| | --------------------------------- |  | -------------- | - |  | -------------- | 
| |                                   |  |                |   |  | Weighted       | 
| |                                   |  | Number of      |   |  | average        | 
| |                                   |  | share purchase |   |  | exercise price | 
| | Continuity of share
      options |  | options        |   |  | ($/option)     | 
| | Balance at beginning of year      |  | 8,306,782      |   |  | 8.71           | 
| | Granted                           |  | 2,199,500      |   |  | 3.00           | 
| | Forfeited                         |  | (82,700        | ) |  | 7.77           | 
| | Exercised                         |  | (21,000        | ) |  | 4.62           | 
| | Expired                           |  | (1,930,052     | ) |  | 6.01           | 
| | Cancelled                         |  | (861,000       | ) |  | 15.44          | 
| | Balance at end of year            |  | 7,611,530      |   |  | 7.00           | 

During the year the Group did not enter
into any share-based transactions with parties other than employees. In 2011,
the Group granted 132,000 share purchase options to non-employees; 15,000 to a
consultant for the provision of investor relations advisory services; 90,000 to
a former director for engineering consulting services; and 27,000 to a
consultant for geological advisory services. The Group determined that given the
nature of the services being provided and that 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 share purchase options granted measured using the Black-Scholes option
pricing model which at December 31, 2012 amounted to ($8) (2011  $458).

Page 25

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

Share purchase options exercised during
the year were as follows:

| |                  |  |                   |  |  | Weighted
      average |  |  | Weighted
      average | 
| | ---------------- |  | ----------------- |  |  | ---------------------- |  |  | ---------------------- | 
| |                  |  | Share purchase    |  |  | exercise price         |  |  | market share price     | 
| | Period           |  | options exercised |  |  | ($/option)             |  |  | on
      exercise ($)  | 
| | January 27, 2012 |  | 17,000            |  |  | 5.00                   |  |  | 7.88                   | 
| | October 5, 2012  |  | 4,000             |  |  | 3.00                   |  |  | 4.45                   | 
| |                  |  | 21,000            |  |  | 4.62                   |  |  | 7.23                   | 

Share purchase options exercised during
the year ended December 31, 2011 were as follows:

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

The following table summarizes
information about the Groups share options outstanding at the end of the
year:

| |                     |  | Share purchase
      options outstanding |  |  | Share purchase options exercisable | 
| | ------------------- |  | ---------------------------------------- |  |  | ---------------------------------- | 
| |                     |  |                                          |  |  |                                    | 
| |                     |  | Number of                                |  |  | Weighted                           | 
| |                     |  | share                                    |  |  | average                            | 
| |                     |  | purchase                                 |  |  | exercise                           | 
| |                     |  | options                                  |  |  | price                              | 
| | Exercise prices ($) |  | outstanding                              |  |  | ($/option)                         | 
| | 3.00                |  | 2,240,600                                |  |  | 3.00                               | 
| | 5.00  5.35         |  | 1,643,000                                |  |  | 5.01                               | 
| | 7.59                |  | 2,331,030                                |  |  | 7.59                               | 
| | 9.74  11.55        |  | 200,000                                  |  |  | 10.87                              | 
| | 15.44               |  | 1,196,900                                |  |  | 15.44                              | 
| |                     |  | 7,611,530                                |  |  | 7.00                               | 

During the year the Group granted 2.2
million share purchase options (2011  2.3 million). The weighted average fair
value per share purchase options granted using the Black-Scholes option pricing
model was $0.87 per option (2011  $6.34 per option). The fair value was
estimated with the following weighted average assumptions:

Page 26

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

| |                         |  | 2012       |  |  | 2011       | 
| | ----------------------- |  | ---------- |  |  | ---------- | 
| | Risk-free interest rate |  | 1.11%      |  |  | 2.25%      | 
| | Expected life           |  | 3.43 years |  |  | 4.20 years | 
| | Expected volatility     |  | 60%        |  |  | 64%        | 
| | Grant date share price  |  | $2.38      |  |  | $13.37     | 
| | Expected dividend yield |  | Nil        |  |  | Nil        | 

|    | Refer to discussion on assumptions in Note 2(p) under
      sources of estimation uncertainty.
|--- | ----------------------------------------------------------------------------------------------
|    |                                                                                               
|(c) | Foreign Currency Translation
  Reserve                                                        

| |                                                                                   |   | Year
      ended December 31 |  
| | --------------------------------------------------------------------------------- | - | ---------------------------- | -
| |                                                                                   |   | 2012                         |  
| | Balance at beginning of year                                                      | $ | 2,470                        |  
| | Exchange (loss) gain on translation of investment in the Pebble
      Partnership |   | (2,206                       | )
| | Deferred income tax on investment                                                 |   | 83                           |  
| | Balance at the
      end of year                                                  | $ | 347                          |  

|   | The foreign currency translation reserve represents
      accumulated exchange differences arising on the translation of the
      investment in the Pebble Partnership which has a US dollar functional
      currency and the related tax effect that has been recognized in other
      comprehensive loss.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                               
|8. | RELATED PARTY BALANCES AND TRANSACTIONS                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                               
|   | Balances and transactions between the Company and its
      subsidiaries, which are related parties of the Company, have been
      eliminated on consolidation and are not disclosed in this note. Details
      between the Group and other related parties are disclosed below:                            
|   |                                                                                                                                                                                                                                                                                                               
|   | Transactions and balances with Key Management
      Personnel                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                               
|   | The aggregate value of transactions with key management
      personnel, being directors and senior management including the Senior Vice
      President, Corporate Development; Vice President ("VP") Corporate
      Communications, VP, Engineering and VP, Public Affairs, were as
      follows:         

| |                                  |   | Year
      ended December 31 | 
| | -------------------------------- | - | ---------------------------- | 
| | Compensation                     |   | 2012                         | 
| | Short-term employee benefits (i) | $ | 2,222                        | 
| | Share-based compensation         |   | 2,781                        | 
| | Total                            | $ | 5,003                        | 

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

Page 27

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

Transactions and balances with other
Related Parties

The aggregate value of transactions and
outstanding balances with other related parties were as follows:

| |                                                                             |   | Year
      ended December 31 |  
| | --------------------------------------------------------------------------- | - | ---------------------------- | -
| | Transactions                                                                |   | 2012                         |  
| | Entity with significant influence(a)                                        |   |                              |  
| | Services rendered to the Group                                              | $ | 3,531                        |  
| | Reimbursement of third party expenses incurred on behalf
      of the Group |   | 1,129                        |  
| | Total paid by the
      Group                                               | $ | 4,660                        |  
| | Jointly controlled entity(b)                                                |   |                              |  
| | Reimbursement of third
      party expenses incurred by the Group           | $ | (25                          | )
| | Total reimbursed (to) the Group                                             | $ | (25                          | )

| |                                                |   | December 31 |  |   | December 31 | 
| | ---------------------------------------------- | - | ----------- |  | - | ----------- | 
| | Balances
      receivable from related parties |   | 2012        |  |   | 2011        | 
| | Entity with significant influence
      (a)    | $ |            |  | $ | 483         | 
| | Jointly controlled
      entity (b)            |   | 3           |  |   |            | 
| | Total                                          | $ | 3           |  | $ | 483         | 

| |                                           |   | December 31 |  |   | December 31 | 
| | ----------------------------------------- | - | ----------- |  | - | ----------- | 
| | Balances
      payable to related parties |   | 2012        |  |   | 2011        | 
| | Entity with significant influence (a)     | $ | 148         |  | $ |            | 
| | Total                                     | $ | 148         |  | $ |            | 

| | (a) | A private company provides geological, corporate
      development, administrative and management services to the Group and its
      subsidiaries at annually set rates pursuant to a management services
      agreement. The private company also incurs third party costs on behalf of
      the Group which is reimbursed by the Group at cost. The Group may also
      make pre-payments for services under terms of the services agreement.
      Several directors and other key management personnel of the private
      company, who are close business associates, are also key management
      personnel of the Group.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (b) | The Group incurred costs on behalf of the Pebble
      Partnership (note 3), which were reimbursed at
cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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

| |                             |   | December 31 |  |   | December 31 | 
| | --------------------------- | - | ----------- |  | - | ----------- | 
| | Falling due within the year |   | 2012        |  |   | 2011        | 
| | Trade payables              | $ | 261         |  | $ | 170         | 

Page 28

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|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(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 for
      the year ended December 31, 2012 was based on the
  following:

| |                                                            |   | December 31 |  |   | December 31 | 
| | ---------------------------------------------------------- | - | ----------- |  | - | ----------- | 
| |                                                            |   | 2012        |  |   | 2011        | 
| | Loss attributable to common shareholders                   | $ | 15,660      |  | $ | 20,139      | 
| | Weighted average
      number of common shares outstanding |   | 94,995,127  |  |   | 94,851,589  | 

|    | Diluted loss per share did not include the effect of the
      weighted average number of share purchase options outstanding as they are
      anti-dilutive.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                              
|11. | EMPLOYMENT COSTS                                                                                                                                             
|    |                                                                                                                                                              
|    | The amount of salaries and benefits included in expenses
      are as follows:                                                                               

| |                                     |   | Year
      ended December 31 | 
| | ----------------------------------- | - | ---------------------------- | 
| |                                     |   | 2012                         | 
| | Salaries included in:               |   |                              | 
| | Exploration and evaluation expenses | $ | 856                          | 
| | General and administration expenses |   | 2,874                        | 
| | Share-based compensation            |   | 5,225                        | 
| | Total                               | $ | 8,955                        | 

|12. | FINANCIAL RISK MANAGEMENT                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The Group is exposed in varying degrees to a variety of
      financial instrument related risks. The Board approves and monitors the
      risk management processes, inclusive of documented investment policies,
      counterparty limits, and controlling and reporting structures. The type of
      risk exposure and the way in which such exposure is managed is provided as
      follows:

|(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, amounts
      receivable and amounts receivable from related parties. The Group limits
      the exposure to credit risk by only investing its cash and cash
      equivalents with high-credit quality financial institutions in business
      and saving accounts, guaranteed investment certificates, and in government
      treasury bills which are available on demand by the Group for its
      programs.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Management assesses the recoverability of the loan
      receivable from Liberty Star as at the end of each reporting period based
    on financial information available.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Page 29

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

|    | In October 2012, the Group delivered
      notice to Liberty Star for repayment of the loan and interest. In November
      2012, the Group and Liberty Star negotiated the Loan Settlement Agreement
      in which Liberty Star was to transfer certain Alaska
  mineral claims held as collateral for the loan receivable in
      payment of the loan including accrued interest. As of December 31, 2012
      and the date of these Financial Statements, as Liberty Star had not
      completed the valid transfer of the claims to the Group as per the Loan
      Settlement Agreement, the Loan Settlement Agreement had not closed and
      accordingly the Group continues to retain its rights under the Letter
      Agreement. The Group has a reasonable expectation that it will recover the
      carrying amount of the Loan by enforcing the legal rights conferred by the
      Letter Agreement and/or the Loan Settlement Agreement including, but not
      limited to, the right to receive all or any portion of the mineral claims
  held as collateral for the Loan (note 5(a)).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(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. The Groups cash and cash equivalents are currently
      invested in business accounts and guaranteed investment certificates which
      are available on demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The funding of expenditures on the Pebble Project held
      through the Pebble Partnership is currently being provided by Anglo
      American (discussed below). Excluding cash and cash equivalents in the
      Pebble Partnership, Northern Dynasty has approximately $28 million in cash
      and cash equivalents for its own operating requirements. With the Pebble
      Projects 2013 funding to be funded by Anglo American, and given the
      Groups holdings of cash and cash equivalents, the Group believes it has
      sufficient resources to cover its short to medium term cash
      requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | As discussed in Note 3, the Group is in a 50:50 limited
      partnership with Anglo American on the Pebble Project. To maintain its 50%
      interest in the Pebble Partnership, Anglo American is required to make
      staged cash investments into the Pebble Partnership aggregating to US$1.5
      billion over a period of several years. To December 31, 2012, Anglo
      American has invested US$504 million ($524 million). When the
      prefeasibility study is completed and if the decision is to proceed, Anglo
      American is required to commit to further expenditures to be expended
      producing a final feasibility study and in related activities, the
      completion of which may take the Pebble Partnership to a production
      decision. Upon an affirmative decision to develop a mine, Anglo American
      is required to commit to the remaining portion of the total investment of
      US$1.5 billion.                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | At December 31, 2012, the Group had working capital of
      approximately $32.1 million as compared to $42.5 million at December 31,
      2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Group has no contractual obligations other than
      current trade payables (note 9) and amounts payable to a related party
      (note 8).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(c) | Foreign exchange risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Group is exposed to foreign exchange risk in respect
      to its loan receivable which is denominated in US dollars. Additionally
      certain of the Groups corporate expenses are incurred in US dollars. As a
      consequence, the Groups results from its operations are subject to
      currency transaction risk and currency translation risk. The operating
      results and financial position of the Group are reported in Canadian
      dollars in the Groups consolidated financial statements. The fluctuation
      of the US dollar in relation to the Canadian dollar will consequently have an impact upon the losses incurred by the Group and may also affect the value of the Group’s assets and the amount of shareholders’ equity.                                                                                                                                                                                                                                                                                                                                        

Page 30

---

|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

The Group has not entered into any
agreements or purchased any instruments to hedge possible currency risks.

The exposure of the Group's financial
assets to foreign exchange risk is as follows:

| | Currency                            |   | December 31, 2012 |  |   | December 31, 2011 | 
| | ----------------------------------- | - | ----------------- |  | - | ----------------- | 
| |                                     |   | Foreign           |  |   | Amount in         | 
| |                                     |   | currency          |  |   | Canadian          | 
| | US dollars 
      Financial assets |   | amount            |  |   | dollars           | 
| |                                     |   |                   |  |   |                   | 
| | Amounts receivable                  | $ | 4,663             |  | $ | 4,639             | 
| | Cash and cash equivalents           |   | 45                |  |   | 45                | 
| | Total exposed to currency risk      | $ | 4,708             |  | $ | 4,684             | 

The exposure of the Group's financial
liabilities to foreign exchange risk is as follows:

| | Currency                                 |   | December 31, 2012 |  |   | December 31, 2011 | 
| | ---------------------------------------- | - | ----------------- |  | - | ----------------- | 
| |                                          |   | Foreign           |  |   | Amount in         | 
| |                                          |   | currency          |  |   | Canadian          | 
| | US dollars 
      Financial liabilities |   | amount            |  |   | dollars           | 
| |                                          |   |                   |  |   |                   | 
| | Trade and other payables                 | $ | 40                |  | $ | 40                | 
| | Total exposed to
      currency risk     | $ | 40                |  | $ | 40                | 

|    | Based on the above net exposures and assuming that all
      other variables remain constant, a 10% depreciation of the Canadian dollar
      relative to the US dollar would result in a decrease in the loss of
      approximately $465 in the year (2011  $433). This sensitivity analysis
      includes only outstanding foreign currency denominated monetary items, and
      excludes the effect of any translation adjustments for the investment in
      the Pebble Partnership.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(d) | Interest rate risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 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 the cash and cash equivalents mature
      impact interest income earned.   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Assuming that all other variables remain constant, a 100
      basis points change representing a 1% increase or decrease in interest
      rates would have resulted in a decrease or increase in the loss as
      follows:                                                                                                                                                                                                                                                                

| |                |   | December 31 |  |   | December 31 | 
| | -------------- | - | ----------- |  | - | ----------- | 
| |                |   | 2012        |  |   | 2011        | 
| | Effect on loss | $ | 325         |  | $ | 389         | 

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|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

|(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, 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.                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                             
|    | Financial instruments measured at fair value are
      classified into one of three levels in the fair value hierarchy according
      to the relative reliability of the inputs used to estimate the fair
      values. The three levels of the fair value hierarchy
are:                  


    Level 1  Unadjusted quoted
      prices in active markets for identical assets or liabilities;
    Level 2  Inputs other than
      quoted prices that are observable for the asset or liability either
      directly or indirectly; and
    Level 3  Inputs that are not
      based on observable market data.


The Groups marketable securities are
classified under Level 1 of the hierarchy however at December 31, 2012, the fair
value of these securities was nominal (2011  $nil).

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|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

|13. | INCOME TAX EXPENSE
|--- | ------------------

| |                                                  |   | Year
      ended December 31 |  
| | ------------------------------------------------ | - | ---------------------------- | -
| |                                                  |   | 2012                         |  
| | Current tax expense (recovery)                   |   |                              |  
| |                                                  |   |                              |  
| | Current period                                   | $ |                             |  
| | Current income tax
      recovery                | $ |                             |  
| |                                                  |   |                              |  
| |                                                  |   |                              |  
| | Reconciliation of effective tax rate             |   |                              |  
| |                                                  |   |                              |  
| | (Loss) for the period                            | $ | (15,662                      | )
| | Total income tax expense (recovery)              |   |                             |  
| | (Loss) excluding income tax                      |   | (15,662                      | )
| | Income tax using the Company's domestic tax rate |   | (3,916                       | )
| | Non-deductible expenses                          |   | 1,323                        |  
| | Reduction in statutory tax rates                 |   |                             |  
| | Foreign exchange                                 |   | 83                           |  
| | Other                                            |   | (1                           | )
| | Deferred income tax assets not recognized        |   | 2,511                        |  
| |                                                  | $ |                             |  

The Company's domestic tax rate for the
year was 25.00% (2011 - 26.50%) and the effective tax rate was Nil% (2011 -
Nil%).

| |                                                |   | December 31 |   |   | December 31 |  
| | ---------------------------------------------- | - | ----------- | - | - | ----------- | -
| | Deferred income
      tax assets (liabilities) |   | 2012        |   |   | 2011        |  
| | Resource pool                                  | $ | 21,144      |   | $ | 21,614      |  
| | Tax losses                                     |   | 58          |   |   | 57          |  
| | Net deferred income tax assets                 |   | 21,202      |   |   | 21,671      |  
| | Investment in the
      Pebble Partnership     |   | (24,834     | ) |   | (25,386     | )
| | Net deferred income tax liability              | $ | (3,632      | ) | $ | (3,715      | )

The Group had the following temporary
differences at December 31, 2012 in respect of which no deferred tax asset has
been recognized:

| | Expiry            |   | Tax
      Losses |  |   | Resource Pools |  |   | Other | 
| | ----------------- | - | ---------------- |  | - | -------------- |  | - | ----- | 
| | Within one year   | $ |                 |  | $ |               |  | $ |      | 
| | One to five years |   |                 |  |   |               |  |   | 1,311 | 
| | After five years  |   | 34,174           |  |   |               |  |   |      | 
| | No expiry date    |   | 169              |  |   | 111,680        |  |   | 66    | 
| | Total             | $ | 34,343           |  | $ | 111,680        |  | $ | 1,377 | 

Page 33

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|Northern Dynasty Minerals Ltd.                                                                         
|-------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                         
|For the years ended December 31, 2012 and 2011                                                         
|(Expressed in thousands
      of Canadian Dollars, unless otherwise stated, except per share or option)

|14. | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                      
|    | Due to the nature of the Groups operations, various
      legal and tax matters are outstanding from time to time. In the opinion of
      management, there are no matters that could have a material effect on the
      Groups consolidated financial position or results of operations which
      require additional disclosure in these Financial Statements.
|    |                                                                                                                                                                                                                                                                                                                                                                      
|15. | EVENTS AFTER THE REPORTING PERIOD                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                      
|    | Share purchase options cancelled                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                      
|    | 32,900 share purchase options were forfeited with an
      average exercise price of $5.46 per option with expiry dates of March 15,
      2014 and June 29, 2015.                                                                                                                                                                                                   

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