“Must Own Pioneer of a New Industry: Undersea Mining”

By Travis Johnson, Stock Gumshoe, June 26, 2008

This company always seems like a science fiction story when I read about them, but you never know … just because we’re not all wearing jetpacks doesn’t mean science fiction can’t come true.

For those of you who aren’t already expert in undersea mining companies, let’s take a moment to examine what this is … and of course, the reason for doing so is that this is a recent teaser stock from Ed Bugos and his free Penny Sleuth letter. He’d like you to pony up for a subscription to Gold & Options Trader, and when you do you’ll find out the name of this company that’s a “must own pioneer of a new industry.”

Or, of course, you can just continue reading my bloviating blather … we’ll get to the company name eventually. Free.

Ed tells us that the offshore oil and gas drillers, with their constant innovation and development of undersea reserves, are the ones who paved the way for this next sector — and that buying this company now is like getting in on the ground floor of that industry in the 1970s, when the energy crisis forced the development of new resources.

Much of that technology developed in the North Sea, the Gulf of Mexico, and elsewhere is the starting point for the technology that this company is using, apparently.

Ed says that we’re about to see “the first major startup in the deep-sea mining industry. If it’s anything like the boom in offshore drilling, you’ll want to be there.”

Some more clues, perhaps?

“The world’s largest gold companies together own over one-third of this company.

“These players are so bullish on the prospects of this industry they all entered into non-competing and anti-dilution clauses just to get a tiny foothold… Teck Cominco and Anglo American have paid millions of dollars for a mere option to participate in a potential future joint venture. And millions more in direct investments.”

Putting aside the fact that “millions of dollars” for Anglo American may be like “the stuff in the handkerchief after you blow your nose” for the rest of us (AAUK had $8 billion in earnings last year), it’s still interesting that these big companies are investing in this sub-sector.

Specifics?

“Anglo and Teck’s investments total more than $50 million … Placer Dome alone spent more than $13 million earning a joint venture interest with this company.”

Ed also shares with us a little bit about the history of mineral discovery in the ocean …

“Outside of a few dredging operations for diamonds off the African coast in recent years, the extraction of minerals from the seafloor is virtually untapped. No one has mined the seafloor, though geologists have long known of its potential…

“For a long while, they thought that these minerals were deposited as sediments from eroding deposits on nearby land. But it was later realized that the source of massive sulfides on land was the ocean, and that hydrothermal events beneath the ocean seafloor precipitated into a mineral deposit upon contact with the water. In fact, in 1985, seafloor massive sulfide systems were discovered off the coast of Papua New Guinea by a research vessel at a site claimed by our company.”

OK, so the clues are piling up. And there’s really only one company doing this kind of stuff as far as I can tell, so I shouldn’t tarry much longer.

Ed says we should buy this because demand for minerals is heating up (really? Golly!), and because undersea mining treaties brought some regulation in the 1990s, but largely because this particular company is leading the pack … as he puts it, profits should follow because of “advances made by our company toward the establishment of the first-ever deep-sea mine this decade.”

So what is this pioneer?

You may well have heard of them before, since everyone loves a good novelty story like this, but the Thinkolator quickly spits out our answer: This company is …

Nautilus Minerals (NUS in Toronto and London, NUSMF on the pink sheets)

This one is indeed partially owned by some mining giants — Teck Cominco and Anglo American both hold small positions (5-7%) and did invest “more than $50 million” (about $65 million, I think) in the company. The founder of Russian iron ore giant Metalloinvest owns about 22% (If you need money for any natural resources project these days, ask a Russian), so together that’s about a third of the company.

The shares are way off their highs of a few years ago, when they flirted with $6, and have been bouncing around between $2 and $3 for much of this year. The company has been in existence, and spending millions of dollars on R&D and exploration for their prospective projects, for many years.

It seems like now, finally, they might be getting close-ish to doing some actual mining — what they look for are “seafloor massive sulfide deposits”, which I guess are analagous to volcanic sulfide deposits in that they’re prime hunting ground for copper, gold, silver and zinc. This is the first time I’ve typed the word “sulfides” since November, I think — back then it was about Albanian volcaniferous sulfides — that stock, incidentally, enjoyed a brief run but is now back where it started.

But anyway, back on point. Nautilus has a “proposed development timetable” that would have them commissioning their equipment and starting production in 2010 (one would have to guess that they mean the tail end of 2010, as seems always to be the case with these “plans”). Since this is essentially a brand new industry and they’re inventing the production and mining equipment as they go along, it would probably be reasonable to assume there could be snags along the way.

I’m not implying that they’re doing anything wrong, just that they’re doing stuff that no one else has done, particularly on the scale of actual production. They have just recently (this week) signed a contract for the first mining vessel to be built, and they have issued contracts for the seafloor mining equipment and for the raiser/lift system, so all the big parts of the equipment are firmly ordered and, one hopes, well designed, but they’re not yet floating around looking for sulfides to dig up just yet. Most of the work is being done by the same companies that develop and engineer for offshore oil exploration and production, so they ought to at least have a good idea of how this will all work.

The CEO is quoted in a press release as saying that this vessel contract award “keeps Nautilus on track for commencement of production in 2010, subject to timely permitting and approvals.”

And, assuming that the stuff all works fine when they get it commissioned, where will they be digging? Or swimming? Or whatever you call it?

Papua New Guinea. Not too far from where InterOil and everyone else is trying to get their LNG production up and running, I suppose. Must be a fun place to be a tax collector or hotel owner these days. They also have some exploration tenements throughout the South Pacific, but Solwara is the first one that will be developed.

Nautilus has a resource area that’s in Papua New Guinea’s territorial waters, and the project is called Solwara 1. It sounds to me like this would primarily be a copper “mine,” but I don’t know all that much about it. They’ve been expanding their tenement area and doing more exploration over the past year, too.

The company as it now stands is trading for not much more than their cash on the books — they have announced that as of May 15, they have abjust under 150 million shares outstanding (throw in another 25 million for warrants and options if you like), and at a share price of $2.34 that’s about $350 million. At the same time, they announced that they have cash on hand of about $308 million, and no debt. I’m not sure I’d loan them money, either, so perhaps the “no debt” isn’t that big a surprise. More than $200 million of that cash was raised just last year in equity financing, so that might also be a reason for the sluggish stock price.

So there is at least a little bit of a backstop here — they do have money to go forward with the project, though who knows whether they’ll need more later. But I don’t want to overstate the fact that they do have a lot of cash on hand — they’re not going to give you any, this is all money that will be spent, so ignore that “book value” number.

Investing in Nautilus Minerals on your part would be a bet that …

a) They will be able to extract meaningful quantities of copper, gold and zinc from their sulfide deposit, starting by 2010.
b) It will cost them less to extract it than the minerals are worth in 2010 or whenever they begin production. (the company says that they are “well capitalized to continue exploration in 2008 and deliver Solwara 1 to production.”
c) The $308 million in cash keeps them going until they get some revenues, or continuing exploration increases their reserves value and makes the stock more attractive as (if) production becomes a reality.

And you’re also going to have to assume that their environmental and mining permits will get approved by the Papua New Guinea government — those permits are expected to be under application and, one hopes, approved in the next year or so, it seems. They have been working with the PNG government, but I have no idea whether or not there are going to be surprise environmental concerns, or trouble with any other permitting.

Last year was the first time that they really spent a LOT of money, about $40 million (in 2006 they spent about $3 million), but I assume that number is ramping up now that they’re paying for more equipment and more exploration. The ship that they’ve just ordered is going to cost $125 million just for the ship itself (for a five-year charter, which is about $70,000 a day), and I’m sure the rest of the equipment is going to help them run through that cash right quick.

So, it should be an exciting time for Nautilus Minerals — they listed on the Toronto Stock Exchange and London AIM over the past year, and raised a fair amount of money, and they seem to be consistently innovating in their equipment, drilling and exploration techniques, reserves analysis, and other areas (at least, according to them). And from what I can tell, the ore/sulfides they’re going after must be very close to the ocean floor, because this looks as much like a dredging operation as a deep mining one (from their diagrams, at least).

Personally, I might be an old stick-in-the-mud, and I’m certainly only partially informed, but I can’t help thinking that it seems likely to me that this will cost a lot more than mining for copper on land (though who knows, maybe pumping slurry to a barge and towing it to land is cheaper than trucking, or maybe the fact that you don’t need to dig a mine shaft and put people down it cuts costs). And the commodity price rise of the past couple years doesn’t seem to me to be related to a physical shortage of copper in the ground, just a lack of investment in developing it in recent years (as opposed to oil, where big land-based reservoirs seem to genuinely be in short supply, at least in the parts of the world where people don’t hate the customers). I can’t help but think that land-based copper mines ought to make a much nicer profit than Nautilus will … and if copper prices fall when new land-based production comes online in the coming years, that might be very bad news for Nautilus.

That’s just my cogitating — I have not looked into how much it will cost Nautilus to produce copper or gold, or even if they’re far enough along to estimate those costs at all. If you know any more about this, feel free to share below.

And of course, my qualms are probably a pretty close match to what the party-poopers always say about innovation and new exploration. Maybe Nautilius will really be the pioneer of a new frontier, and get bought out by the Russians or a mining major in a bidding war, and spend the decades to come outfitting a fleet of mining ships that spans the globe, and supplying the copper that electrifies Asia and Africa.

What do you think?

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10 Comments on "“Must Own Pioneer of a New Industry: Undersea Mining”"

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Larry DiBiaso
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June 27, 2008 10:01 am

Without further looking, this sounds like a pig-in-a-poke to me, because it is hightly likely that the costs will far exceed the benefits in $/oz or $/ton. But, I’ve missed more than a few good ones before.

Larry D.

Kay
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Kay
June 27, 2008 10:46 am

Anybody upto taking a shot at figuring out this tease from Jim Grant of the expensive and hi-brow Grant Interest Rate Observer?

” The world’s largest manufacturer of […] happens to be sitting on a [large] hedge-fund portfolio. Returning excess cash to the shareholders, some companies pay a dividend, others repurchase their own shares. This company does both and something else besides: It invests in “more than 200 funds in a wide range of asset classes, industries, geographies, currencies and with differing risk profiles.”
We’re bullish on this unconventional enterprise, to relieve the suspense. . . “

DJY
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DJY
June 27, 2008 11:08 am

Admittedly the Nautilus charts are very disappointing, but the sheer size of ocean area covered by their permits is tremendous, and their website shows good mapping. Compare this to a land based mine and the volumes are huge when depth is factored in. Deep-sea vents are certainly mineral rich and to me the crux is the environmental permit issues. Here’s hoping this one’ll be providing my pension pot in 30 years time! Enjoyed the NUS summary Gumshoe, and keep on truckin’!

schmeedabee
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schmeedabee
June 27, 2008 11:29 am

Thanks for your analysis. If they were mining for rare earth metals, then I’d be really interested.

Grimme
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Grimme
June 27, 2008 7:59 pm
Many years ago manganese balls were found littering the ocean floor in there billions over vast areas, dredges were designed and built to scoop them up and bring them to the surface, these balls were like baseballs to softball sizes and were also full with other quite valuable minerals, REE, silver, zinc etc. At the time harvesting was put on hold because the resourse was so easy to get and cheap and the resourse so vast that the prices of all the metals would collapse but I have often wondered if this resourse could ever be harvested again. At the… Read more »
Grimme
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Grimme
June 27, 2008 8:07 pm

There’s no question of riches on the seafloor, just a few years ago in New Zealand a huge gold deposit was discovered in the Kermadecs, a deep volcanic trench that heads north from New Zealands east coast up to Fiji, however it was said that mining/harvesting would be considered to dirty, the enviro. impact to great to warrant extraction.

sassoc
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sassoc
June 28, 2008 6:50 am

This appears to be a perfect whole-on-the-ground project (more precisely : whole-in-the-seas), where cost far outswings any future profits (if any, and doubtful). The funds of the company are no match to real-world exploitation, let alone startup expenses. The participants have furnished cookie-sized coins, it sounds nice to be in, a teaser. The Russian particpator, a gamble.

Dividends4Life
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June 28, 2008 8:34 am

I don’t see a positive cost-benefit relationship anytime in the near future. The price and demand are not near the levels needed to justify this.

Best Wishes,
D4L

sniper
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sniper
June 28, 2008 5:36 pm

The stock to invest in is the builder of the equipment to mine these riches.

winstonC
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February 9, 2010 6:21 pm
Hey Gumshoe- Have you thought of revisiting the v.2010 of Nautilus? They may be pulling off a J. Verne after all. Hope all those snails are edible…take a look at the drillcores. Land copper mines get really excited if there is 3% of it in the ore. The samples to date show concentrations at 17% and above. Zinc at 50% concentrations. Forget about the precious metals-they’re just gravy. At a mere 200 tons/day, assuming 15 days per month average production for a year. That’s ’round 1.82 million pounds of copper per day, or 27.3 million pounds of copper per month.… Read more »
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