Sunken Treasure: A Mining Stock for the Bold

To get some breathing space after this potential Doomsday event, Nautilus closed a private placement in September 2012 of C$34 million at C$0.90 per share, with its biggest shareholder Mawarid upping its stake in the company and gaining the right to appoint a member to the board -- in this case the founder and chairman of Mawarid’s parent company, Dr. Mohammed Ali al Barwani. But the breathing space turned out to be insufficient as the project remained frozen, and Nautilus terminated the building of its seafloor production system and laid off around 60 people in November of 2012. To further fund care and maintenance, Nautilus resorted in June 2013 to a C$36 million rights offering at C$0.18 and slashed its research and development spending and executive compensation. Its largest shareholder, MB Holdings, remained steadfast in its support, acting as the standby purchaser for the offering. In August 2013, Nautilus and the Papua New Guinea government entered arbitration in a Sydney court. In October of the same year, Nautilus emerged victorious with a decision ordering the PNG government to pay what Nautilus deemed them to owe. But even this failed to get the PNG government back on board: they missed a court-mandated deadline to pay the US$120 million they had themselves initially agreed to. Undaunted, Nautilus nonetheless continued to work with PNG toward a commercial resolution of the dispute.

Then, in April 2014, after Nautilus’s price had hit a bottom amid a continuing disastrous environment for even gold stocks without issues, the company made the dramatic announcement that it had come to a mutually acceptable resolution with Papua New Guinea, ending the years-long dispute and in effect wiping their contractual slate clean to start afresh. In return for the restart, they secured for the government third-party participation rights in the considerable intellectual property generated through the building of all the seafloor mining technology the Solwara project would require. With things now looking up, the markets reacted positively, and Nautilus climbed to C$0.67, the biggest gain since its October 2013 arbitration victory. PNG made an immediate US$7 million down payment on their $120 million share of the project. Importantly, Johnston’s confidence that the PNG would, indeed, live up to their new bargain was validated in mid-December of 2014, when the remaining $113 million flowed out of escrow and into Nautilus’s hands. The payment entitles the island nation to a 15 percent stake of Solwara-1 with the option to purchase another 15 percent in 12 months. This suggests a valuation of the Solwara-1 project at $753 million and change, or C$1.43 per share.

Things are now starting to move forward again. Nautilus has formed a joint venture with Eda Kopa (Solwara), a wholly owned subsidiary of Petromin PNG Holdings Limited (the vehicle Papua New Guinea uses to acquire state ownership of stakes in mining and fuel company assets), and has chartered the “world's first bespoke underwater deep sea mining support vessel,” as the maritime newspaper Lloyd’s puts it, from the UAE’s Marine Assets Corporation, which is having the ship specially built in China. It’s gotten two of the three pieces of equipment necessary to actually conduct mining operations on the seafloor built by Britain’s Soil Machine Dynamics, which specializes in building vehicles and support machinery for undersea work. The slurrying systems and the risers and lifts are under construction. Nautilus expects to take delivery of the specialized equipment over the course of the next 18 months and delivery of the vessel itself in 2017. With the ship and the seafloor equipment in its hands, it plans actual production at Solwara in 2018.

Now that Solwara looks much closer to reality than it has at any time since 2011, any potential investor needs to consider the question of its cost: Nautilus has projected that US$450 million will be needed to build the project, but that does not include the cost of the ship that will hover above the SMS deposit and suck up the slurried ores. On that, Nautilus made a US$10 million prepayment against a US$18 million, five-year charter agreement (with an option to purchase) with Marine Assets Corporation. All in all, that’s a total expenditure of $458 million, a significant amount for a company with a market capitalization of $205 million to finance. Once Solwara goes online, however, it is expected to produce approximately 1.3 million tonnes of material per year -- at an $80 per tonne operating cost -- which would indicate expected annual gold production of 170,500 ounces.

And then there’s the fact that the project generated local opposition on environmental grounds before it suffered its contractual setbacks. Ecologists in general worry that deepsea mining could harm the unique life forms that congregate around the vents producing the mineral-laden plumes that leave behind SMS deposits. In Papua New Guinea specifically, a leader of the 1.2-million-member Evangelical Lutheran Church of PNG, Giegere Wenge, has been vocal in his opposition to the project on ecological and theological grounds (seabed mining apparently violates their church’s understanding of Biblical
doctrine) -- and in a country of 7.3 million people, a denomination that size can carry some weight.

Despite the drama and the hefty capex bill in a tough financing environment for junior miners, all in all, at its current price of C$0.46, Nautilus looks extremely cheap to us. Our proprietary model suggests that at a 12 percent discount rate -- high but perhaps merited, considering that Nautilus is a risky proposition -- and including all its cash, Nautilus has an NAV of US$4.30 at $1,200 gold. At $1,400 gold, that rises to $4.64; at $1,600 NAV hits $4.99, and at $1,800 $5.34. If Nautilus gets going and shows that it can in fact do what it has promised to without any more significant hiccups, and assuming a discount rate of six percent, at $1,200 gold NAV is eight bucks even; at $1,400 $8.61, at $1,600 $9.22, and at $1,800 $9.83. That’s solid leverage. This does not take into account any increase in value coming from the enormous seafloor land positions Nautilus holds, which will start to look attractive if Solwara-1 proves viable.