Wednesday, September 28, 2011

Nautilus Minerals, Solwara 1 Usher In New Era In Deep Sea Mining (Autonomous Vehicles, High Mineral Grades & Vast Resources of Rare Earth Metals/Diamonds)

   Nautilus Minerals is the first among only a handful of mining companies aiming to commercially exploit the ocean floor by 2014. Known as Seafloor Massive Sulfide Deposits, the deep sea ore formations occur at places such as hydrothermal vents located at mid ocean ridges. Deep sea mining is a relatively new concept that last received widespread attention in 2010 when China's rare earch metals embargo on Japan raised interest in metal rich manganese nodes located beneath the ocean floor (China controls 95% of the world's rare earth metal supply). Update on China's rare earth metal quota: The first group of companies passing stringent environmental tests, have received their export quotas for the 2012 year and it totals 10,546 tons which isn't bad considering more than 10,000 more tons is expected in upcoming tranches and that rare earth export demand amounted to only 14,750 tons in the Jan to Nov period of 2011 or 49% of the 2011 government conceived quota (30,184 with total production capped at 93,800 tons). It should be noted however that China haulted production at three mines in September which account for 40% of production, and that China only has 37% of the the world's proved reserves despite being the source of 97% of global supply (as recently as the 1980's California was a major source but lower prices forced many mines to close).
Deep sea mining appears to be economically viable, with copper concentrations reportedly higher than at a number of other mines including the one in Chile that received notoriety in October when 33 trapped miners were rescued. (NY Times: Rare-Earth Minerals Hold Promise for Seabed Mining) Manganese nodules are manganese-iron based potato sized sedimentary rocks containing rare earth metals (between the sediment grains), elements which have a myriad of uses in everything from computers and lasers to rechargable batteries (electrodes). Another advantage deep sea miners have: Organizations like the International Seabed Authority which oversee environmental management, don't have regulatory authority over the mineral resources meaning companies can apply for exploration leases without worrying over whether their conservation practices adhere to another's strict guidelines (the vents are home to tubeworms and clams as well as microbes which feed off the sulfides). Interest in deep sea mining began in the 1980's (oil in the 1940's) and came as a result of a recognition that deep ocean ore contains high copper grades. One of the reasons it took so long for companies to begin mining projects is a lack of submersible, deep-water vehicles used in mapping and sampling. Advancements in autonomous/remote operated vehicles have since removed those barriers. (Yale:Deep-Sea Mining is Coming: Assessing the Potential Impacts by Erica Westly)

Some background information on ocean floor mining: Sea floor deposits can be found anywhere from the surf zone to a depth of 5,600 m. Interest in deep sea mining has experienced rapid growth evidenced by the rise of companies which develop underground mining technology (5-fold increase in Cape Town's IHC Marine and Mineral projects between 1998 and 2008). (Mining Weekly: Australia will be first to excel at mining ocean floor for gold, copper, top Canadian professor predicts) Oil drilling went offshore in the 1940's followed by diamonds many years later (De Beer's mines at a grade of 0.1 carats/sq meter off the coast of South Africa which is higher than average grades on land) and a brief period in the 1970's when gold was mined offshore from Alaska. Offshore mining presents great opportunities considering that 70.8% of the world's surface is covered by water and that for many countries, land offshore exceeds their dry land base. In terms of polymetallic mining, Toronto-based Nautilus isn't the only company engaged in exploration. There's also London's Neptune Minerals (licenses cover more than 278,000 km2 in New Zealand, PNG, Micronesia and Vanuatu) circa 1999 and Toronto-based private firm Marine Mining Corp. which searches off the coast of Ghana for gold circa 1993. Rio Tinto was one of the first mining companies to trial autonomous vehicles in 2007 (used in aluminum mining/smelting), since then they have implemented their use at various mining sites including the Port Dampier iron-ore facility where operations are conducted by huge remote controlled stackers and reclaimers. Also of note: Molybdenum is the 54th most abundant element in the Earth's crust and the 25th most abundant element in the oceans.

Nautilus is notable in that it is the world's first company to start a seafloor polymetallic mining project, the copper-gold project known as Solwara 1. The project, located 1600 meters below the Bismark Sea of Papua New Guinea could usher in a new era in deep sea mining. Nautilus owns many other projects as well with more than 600,000 km2 in possible liceneses in the pacific ocean between Tonga and Papua New Guinea (in Fiji it is joint ventured with Tech Resources).
Solwara 1 grades (indicated) 6.8% copper, 23 g/t for silver and 4.8 g/t for gold (out of 670,000 tonnes of massive sulfide deposits) but inferred resource grades jump to 7.5% copper, 37 g/t for silver and 7.2 g/t for gold with initial annual production estimated at 1.2 million tonnes (ore).In 2008 Ian Lipton of Golder Associates Pty Ltd estimated resources at: Copper: 870,000 lb indicated (1.3M lb inferred); Gold: 134,000 ounces indicated (300,000 oz inf); Silver: 643,000 ounces ind (1.55M oz inf); Zinc: 7.67M lb ind (22.93M lb inf). source: page 149 of 275 of Nataulus Solwara 1 Offshore Porduction System Definition and Cost Study June 21, 2010. About 60% of the total resource is inferred.
Solwara 1 last received board approval in April 2011 just after a strategic partnership was formed with shipping company Harren & Partner. The joint venture provides Nautilus with a floating platform from which production machinery will be remotely operated, the platform will also serve as a production support vessel housing a dewatering plant/anchoring barges. There are 2 joint ventures overseeing construction and chartering of the vessel, one is 70% owned (other 30% by Petromin) by Nautulis, the other is under 45%. The production support vessel won't be delivered until the first half of 2013 just 2 quarters prior to commencement of production; The build program is 30 months long and started after Nautilus's board approved the project. The shipping joint venture cost a total of $127M of which only about $35-$40M will be Nautilus's responsibility ($75M is with Germany's Harren). The total capital cost of
Solwari is $383M, operating expenses are $150M. The first environmental permit was received in December 2009. The project cost Nautilus $42M in the first six months of 2011, much of it spent on equipment/JV. The dewatering plant is being constructed by DRA Brisbane. In August/September 2011 Nautilus raised the last $100M needed to completely cover the capital/development costs associated with Solwara 1. The $100M comes as a private placement (investors take a stake in the company) with interest coming from MB Holdings of Oman ($50M), Anglo American (11.1% shareholder maintained) and Metalloinvest (already owns 21%) and institutional investors (contributed the rest of the $100M). The private placement comes about a month and a half after the company abandoned efforts to raise the money (up to $150M) domestically through the public equities market (began mid May) citing weak interest from investors stemming from adverse market conditions. Even with strong backing from major copper miners Metalloinvest (21%), Anglo American (11.1%) and Teck Resources (6.8%), failure to raise needed funds in the public market affected Nautilus stock at the time, during the month-long ordeal begining mid May, the stock price fell from $2.75 down to $2.48 per share. Also, it was the first attempt to raise public capital since 2007 when it raised money to join London's AIM exchange. (Nautilus Minerals fails to raise $150M)(Mineweb: Nautilus to raise $100m, fully-funding offshore mining project) 30% of Solawari 1 is owned by the PNG government, the interest is obtained through project financing and the incurring of costs through Petromin. Another reason to like Nautilus: Its largest shareholders are either experienced miners (Tech Resources, AngloAmerican, Metalloinvest) or are involved in shipping equipment (Harren).

On August 11, 2011 Nautilus became the first private company to be granted a license to explore offshore Fiji. The licenses cover over 230,000 km2 of seabed containing gold, zinc, silver and copper. The decision follows the International Seabed Authority's grant of exploration licences to Nautilus. Nautilus also has exploration licenses in the waters of Tonga (next to Fiji) where exploration occurs at depths of 4500 m (ore is polymetallic differs from PNG project in terms of its manganese and cobalt deposits). Its cash ($111.977M end of June 2011 down $53.156M) is not all in one currency, it is spread between 4 (54% USD, 30% GBP, 11% EUR, 5% CAD) protecting the company against fluctuations in exchange rates. In terms of the equipment, the company is trying to get the cutting heads delivered by the end of 2011. Already in 2011 Nautilus reinstated its contract with GE Oil & Gas involving the subsea slurry lift pump. This component is key because the slurry (liquid wixed with solids) can be very difficult to transport due to its abrasive/corrosive nature. (Engineering and Mining Journal: Spotlight on Slurry) Though the company's lone corporate office is in Toronto operations are run out of Brisbane, Australia.

Key Financial Metrics as of September 28, 2011

Nautilus Minerals, Inc : Market cap: $410M (price per share up 27% last 12 months), 155.89M shares (tsx:nus). End of 1st six months of 2011: operating expense $8.48M (down 70.0% hoh), earnings -$7.99M (up $19.48M hoh). Research and Development spending reached a near term high of $14.34M in the six months ended December 31, 2010. Though the company maintained its debt free status, cash equivalents fell to $92.82M (cash & short term investments $111.98M) at the end of June, down from $104.16M ($139.01M) at the end of March. Cash equivalents were as much as $184.65M exactly one year earlier (June 2010).

Anglo American plc (ADR) : Market cap: $49.90B (price per share down 7.42% since Sept. 29, 2010), 2.69B shares (aauky). End of 1st six months of 2011: revenue US$ 15.237B (up 21.0% hoh), operating expense US$ 8.686B (up only 1.5% hoh), earnings US$ 3.988B (93.50% more than first half of 2010 but down 11.0% compared to the last half).


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