Sunken Treasure: A Mining Stock for the Bold

Flickr. Nautilus Minerals hopes to  mine high-grade gold from beneath the Bismarck Sea, pictured here.

Flickr. Nautilus Minerals hopes to mine high-grade gold from beneath the Bismarck Sea, pictured here.

Jules Verne’s famous submariner Captain Nemo piloted his opulent vessel the Nautilus to the sites of shipwrecks around the world to harvest their gold in the classic adventure story 20,000 Leagues Under the Sea. Nautilus Minerals (TSE: NUS), a Toronto-based mining company with shares currently trading hands at C$0.46, is trying to replicate Nemo’s feat. Their targets, however, are not the holds of richly-loaded sunken frigates, but massive deposits of gold and other metals on the ocean floor. And they won’t be using a 19th-century Frenchman’s fanciful idea of a submarine to grab the gold, either: their proposed tools are state-of-the-art seafloor mining machines and a first-of-its-kind seafloor mining support ship -- one that travels on the waves, not beneath them.

As Verne’s preoccupation shows, harvesting the mineral wealth at the bottom of the sea is not a new idea. Offshore oil and gas projects have been a mainstay of the fuel sector since the early 1890s. But getting at the valuable metals lying on the seafloor is another question entirely. The 1960s and 70s saw multinational mining consortia harvesting manganese nodules from the ocean bottom for the nickel and iron they contained. This laid the groundwork for future seafloor mining developments by building up the industry’s collective technical expertise, but the project itself was derailed by a glut of nickel in the world market.

Nautilus, which began life as a Canadian oil and gas exploration outfit, is playing a different and potentially much higher-stakes game: it specializes in locating and targeting seafloor massive sulfides (SMS), deposits rich in gold, copper, silver, and zinc that form around hydrothermal vents. They are essentially undersea volcanoes located in tectonically active zones, vomiting forth plumes of superheated chemicals. These precipitate metals as they find equilibrium in the frigid, basic ocean water they erupt into. The unique environment allows communities of exotic bacteria and sea life (the fearsome-sounding giant tube worm among them) to flourish under seemingly hostile conditions. That's not mere color: environmental concerns could be key for Nautilus. But more on that in a bit.

Nautilus has been in the undersea exploration business since 1997, when it began sniffing around SMS in the Bismarck Sea off Papua New Guinea. These exotically formed deposits have a number of advantages over traditional mining targets.

First, seafloor projects are generally very high in grade: the Solwara-1 project, located about 19 miles off the coast of Papua New Guinea and which Nautilus envisions as its first real commercial prospect, has indicated resources of 1 million tonnes and five grams per tonne of gold and inferred resources of 1.5 million tonnes and 6.4 grams per tonne of gold. The current average grades of terrestrially mined gold -- around one gram per tonne and headed downwards -- make Solwara-1 look extraordinary even if the price of gold doesn’t see any significant upward action.

Second, Nautilus is first to the party. There has been no real demand for the kind of leases they’ve acquired, so they’ve acquired and acquired and acquired them, to the tune of a massive 500,000-plus square kilometers. And if the Solwara-1 project pans out, it means that Nautilus will have gotten into a whole new field of the mining industry before anyone else, with the advantage of years of technical preparation, and will own a huge swath of key real estate.

Third, the method proposed is revolutionary. A massive ship outfitted with a huge pump would position itself over three enormous pieces of equipment operating on the seafloor, cutting, grinding, and slurrying the mineral-rich rocks around the vent before pumping the slurry skyward into the ship’s cargo hold, to be readied for transport to shore. This means, in effect, that Nautilus would be operating a mobile mine, one not constrained by the physical location of a deposit -- the ship and the seafloor equipment could exhaust Solwara-1 and move on to the next tenement without incurring additional capital costs. They don’t have to dig, in other words -- their mine moves to where the gold is.

The company is now helmed by Michael Johnston, an industry vet with knowledge of the complex issues in mining across East Asia. Its largest shareholders are Mawarid Mining, a subsidiary of the Omani exploration giant MB Holding, Uzbek mining titan Alisher Usmanov’s Metalloinvest, and mining major Anglo American. Nautilus listed in Toronto in 2006. It peaked early, at C$5.20 that same year, and its stock has looked wobbly ever since. It hit an especially bad patch in recent years, however. After making something of a recovery towards the start of 2011, it’s been stuck in a seemingly unstoppable slide downward.

The problems that caused this slide arose not from technological setbacks, but from issues all too familiar to miners of every type: the difficulties of doing business with a small government that holds all the cards when it comes to the undersea territories Nautilus wants to mine for their gold and copper. In January of 2011 Nautilus was granted the world’s first deep-sea mining lease by Papua New Guinea; its government soon afterwards closed an agreement with Nautilus under which the island nation would purchase a 30 percent stake in the Solwara-1 project, then slated to begin production in 2013. This development prompted a rise in stock price to as high as C$3.48. But then, in what seemed to be a possible deathblow to the world’s first seafloor mine, in June 2012 Nautilus suddenly announced that it was in dispute with the PNG government, accusing it of having reneged on what Nautilus declared its contractual obligations to make significant payments for development costs already incurred in the construction of equipment to mine Solwara-1 as well as capital contributions going forward.

On the day of the announcement, the stock dropped almost 40 percent, from C$2.01, already significantly off the high, to C$1.23, and continued to slide, reaching a low of C$0.20. This occurred against an ugly backdrop for the broader gold space as even the large-cap gold miners were in the start of what has been a vicious bear market. Small wonder that the news of the fight with Papua New Guinea absolutely hammered Nautilus, a comparatively tiny company proposing to use unproven technology to mine a single commercial prospect.