The following was originally published on July 2 in the Friday File for the paid members of the site. It is republished here with no editing or updating, and the author continues to have no position in the stock.
Well, this seems like a good way to get back to work after a week of moving — and I must say, I’m relieved that it’s not a hugely difficult teaser, since the mighty Thinkolator is not yet up to speed after the move. Hopefully I’ll find the rest of the pieces by next week.
This teaser ad is for another special report and conference call from Stansberry & Associates, a call that they’ll be holding on July 12 (so although the stock is actually moving up already today, a strong indicator that lots of investors figgered this one out on their own, thanks very much, there is a potential catalyst from this call in 10 days that could bump the shares up or down considerably — and on July 8 they’ll release the written report on this one to subscribers, so that could make a difference as well).
The product they’re selling is their most expensive newsletter, Phase 1 Investor, so there are probably lots more folks who figured the stock out on their own or who are reading this note today than will subscribe to the newsletter for this deal (the list price is $5,000, they’re currently selling it for $3,000 … still one of the more expensive letters I ever write about). Phase 1 recently got a new editor, Frank Curzio, who concentrates on low priced stocks (he ran a “stocks under $10″ letter for TheStreet.com before leaving and resurfacing at Stansberry with a new penny stock letter, and now they’ve given him Phase 1 as well.) I don’t know Curzio, though I listen sporadically to his podcast and generally like the kinds of ideas he hunts down.
But you just want to know what this “gold sands” stock is, right? For me that conjures up the Alberta oil sands, but this time we’re actually talking about sand that’s a lot closer to the beach. Here’s how they introduce it in the ad:
“We’re received report of a major gold discovery… in a location you’d never guess in a thousand years…
“If this gold were buried underneath the Washington Monument… or the Sears Tower, it would probably be less surprising…
“But the fact is, after 10 years of investing and writing about finance, I’ve never heard or seen anything like it.
“And I’m not the only one…
“‘Geologically… this is definitely the best prospect I’ve ever seen…’ said Dr. Charles Morgan, a geochemist and former project manager for the U.S. Department of Interior.
“‘The gold content is incredibly high,’ Dr. Steven Scott, professor emeritus of geology at the University of Toronto, said in an interview. ‘It is exceptional.’
“‘These are very, very high contents of valuable metals,’ said CSIRO scientist, Dr. Ray Binns.”
Sounds exciting, right? So why isn’t this in the headlines and getting chatted about on all the investing sites? There has to be a catch, right? More on that in a moment …
“… this discovery is located in one of the most unusual places on Earth. When I tell you where it is, I’m sure you will be surprised—it’s a place no man has ever stepped foot.
“The other interesting thing about this situation is that several of the largest gold and resource companies and investors in the world have quietly been building positions in this tiny firm../ including a powerful billionaire metals-and-technology investor who has invested in Facebook, Gazprom… and whose last stake in a small resources company shot up as much as 910%.
“It’s just a matter of time before these guys tap this gold and mineral treasure trove.
“In fact, we think this could happen very soon.”
So … some of you will have already figured this out, but they’re talking about underwater mining — that narrows the list of companies down to, oh, about one … here’s some more about the location, and the reason for this highly concentrated ore:
“So, where is it? Where is all of this gold buried?
“Here are a few hints:
“There’s no traditional mining infrastructure needed.
“There’s sand everywhere.
“And it’s 1,650 meters below sea level.
“That’s right, it’s underwater!
“… About a mile below the Pacific Ocean, in a region called Melanesia…
“There’s an incredible amount of gold and other rare metals such as silver, copper and zinc.
“Billions of dollars worth.
“And one tiny company may soon have the rights to mine and produce it….
“… it’s not far-fetched at all…when you consider the geology of how gold mines work.
“You see, most of the world’s richest gold deposits were underwater at one time… typically thousands of feet beneath the ocean.
“The amazingly rich mines of Ancient Cyprus… Eastern Egypt’s gold and silver mines… Kid Creek in Canada… Rio Tinto, and BHP Billiton’s original cash cow – Broken Hill…
“They all started out in the ocean, along hot cracks in the ocean’s floor called ‘volcanic vents.'”
And I told you that the list was narrowed down considerably by just the mention of an “underwater miner” … so who is it? This stock is … Nautilus Minerals (NUS in Toronto, NUSMF on the pink sheets)
And yes, I mentioned that the stock is already moving thanks to this teaser campaign — the stock is up 20% today on no other news. Heck, even the completely unrelated Nautilus Inc. is up a few percent today for no reason, perhaps just because of the similar name (that’s a guess — Nautilus Inc., ticker NLS, makes fitness equipment, just FYI).
Nautilus has been exploring in their zone offshore Papua New Guinea for many, many years, and they have identified several prospective areas of underwater volcanic sulfides that include high concentrations of copper, zinc, gold and silver — they were the first explorer to get a commercial exploration license for this kind of underwater project, in the area that they call their “Solwara” prospect, which encompasses a number of named sites (Solwara 1, 2, etc.). They also have other exploration tenements in the South Pacific, including offshore Tonga and New Zealand among a few other spots, but the Solwara project is clearly the basket they’re putting almost all their eggs in right now.
And it has been for a very, very long time — there are a number of quotes in this ad from mining experts and reputable sources, but almost all of them come from a New York Times article about this exploration project. That’s not to say there’s anything wrong with the source, of course, but it’s very much worth noting that the article ran in 1997, when Nautilus got these exploration licenses. This is also an industry — whether on dry land or underwater — that’s fueled by optimists. Here’s a quote from the Nautilus CEO from that article — 13 years ago — about what they saw as the “immediate future” …
“‘I see hundreds of millions of dollars worth of metal in the immediate future,’ said Julian Malnic, the company’s chief executive, who works in Sydney, where Nautilus has an Australian office. ‘And it won’t take us very long to get into the billions.'”
Well, I don’t know what “immediate” means to Nautilus, but for your friendly neighborhood Stock Gumshoe it certainly means “less than 13 years.” Julian Malnic, for what it’s worth, is no longer the CEO.
Nautilus’ first project that they hope to build, Solwara 1, is, at the very least, an interesting testing ground for what they hope will be a new generation of underwater mining equipment — they and their contractors have been modifying deepwater oil drilling equipment and underwater robotic vehicles to develop the capability to mine ore and transport it to the surface for processing. The technological challenge seems absolutely ridiculous — this isn’t something that happens to be under just a couple hundred feet of water but can be fairly easily reached, this project is almost a mile underwater, roughly similar to the depth at which BP is having a devil of a time capping their spewing well after the Deepwater Horizon explosion.
So it’s no surprise that nothing is working as quickly as one might have hoped — just as it’s no surprise that the company suffers from the perpetual optimism of almost all of their peers in the mining world. I wrote about Nautilus a couple years ago when it was being teased by a different newsletter, and at the time they expected to begin production in about two years … which might have them producing ore right now. They did get the environmental permit back in January, but the application for the mineral lease and the approval of their development plans are still apparently pending (they were submitted about 18 months ago).
And when will they actually be producing? Well, they are doing more exploratory drilling this year, aimed at expanding and defining the resource and getting to a deeper depth, but it’s going to be a long, long, long time before they’re selling ingots — just last week they released their preliminary estimate for the offshore production system and the key take-aways I pulled from that release were that capital costs were estimated at about $400 million, and it would take 30 months to commence commercial production. And that’s after they get approval from Papua New Guinea for the mining lease and plans, and after the board approves the plan for the offshore production system … and it doesn’t include plans for how to process and concentrate the ore after they get it off the barges and onto land.
On the positive side, they do have a lot of cash — they have no debt and the company is currently valued at about $280 million, but they have $196 million in cash on hand. So that’s a good start, though of course it’s a fraction of the funding they’ll probably need to reach any kind of sustainable commercial level of production. They were in much the same position two years ago, though at the time it was closer to $300 million in cash, so over two years of continued exploration and permitting they’ve spent about $100 million. Given the groundbreaking nature of this project, even if we assume that the mining lease is issued as expected by the end of this year, one would have to guess that there will be technical problems and challenges that we can’t even imagine at this point.
So how do you figure out how much this is worth? That I can’t say, except that it’s probably worth something, so if it got down to closer to cash value I’d be significantly more interested (that’s about $1.25), but I find it very hard to believe any projections about when the actual mining project might start and when in the future they could possibly become profitable. And to be honest, the cash per share figure is really just a convenient valuation crutch, since they’re likely to spend all that cash and more over the next couple years and there’s not much chance they’d liquidate and send you a check for your share.
So as you might have imagined before we even started this little note today, yes, there is a catch — it’s great to hear about a hugely concentrated resource of gold and copper held by a little company with a plan to extract it, but the list of things Nautilus Minerals has to do that have never been done before in order to extract that ore is pretty daunting, even 13 years after they first started commercial exploration.
I’d guess that those institutional investors like Teck Cominco and Anglo American aren’t counting on this company adding to their bottom line anytime soon, and we’d probably all be best off if we thought similarly — I’m not against a lottery ticket every now and then, and there are catalysts including this Stansberry call next week and a possible mining lease being granted later this year, but they’re not going to be calling this lottery’s winning numbers for at least a few years… absent any big news from the company over the coming weeks, it seems unlikely that the 20% jump in the shares today or the bump we may see when Phase 1 releases its report and holds the conference call would be sustained for very long.
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