Last week, I took a small position in an exploration stage company called "Nautilus Minerals" (TSX/AIM: NUS). I am typically not interested in exploration stage companies, but this particular company does something that at first sounds like sci-fi: Their first mine will be located 1600 meters below the surface of Pacific Ocean near Papua New Guinea. In fact, long ago it was sci-fi. Jules Verne envisioned underwater mine in his book "Twenty Thousand Leagues under the Seas" back in 1870. I haven't read it, but I sure am familiar with Captain Nemo and Nautilus (the submarine) that were introduced by this book. It seems that Nautilus Minerals have taken their name from Nautilus the marine creature (not the sub) based on their logo.
The Nautilus, as pictured in "The Mysterious Island". Source: Wikipedia.
Oil and gas industry went offshore in the 1940s and now it might be the time for mining companies to do the same. Nautilus Mining will use existing offshore oil technologies to cut ore from the seafloor and pump it to the surface as seawater slurry. Once the ore is dewatered, it will be shipped to shore for processing.
Recently published independent engineering study titled "offshore production system definition and cost study" related to the first ever underwater mine "Solwara 1" reveals some very interesting things. Indicated and inferred resources combined and valued at market prices for metals put the mineral deposit somewhere around 1,6 billion USD (at the time of writing). Most of this is copper (about 1 billion USD) and gold (about half a billion). Extraction requires 383 million USD capital expenses and approximately 150 million operating expenses (estimated based on $70 USD per tonne OPEX). The difference of resource value minus direct CAPEX and OPEX is over 1 billion USD. Naturally not all of this can be clarified as profit as there are other expenses involved in the process (such as smelting and refining).
Nautilus Minerals has about 169 million shares outstanding (diluted) and 196 million USD in cash (additional 40,7 million USD if all options etc. are excercised). The required CAPEX needs to come from somewhere. Either they have to issue more shares or then they need to sell some of the future revenue for cash today. So let's assume they sell more shares. Let's further assume that they can cover this by issuing 131 million shares putting total shares outstanding to 300 million.
Now, to justify the current share price of 2.11 CAD (about 2.05 USD) they would need to be able to make profits in the range of 600 million (net present value of future profits). If successful and completed within the CAPEX and OPEX estimates, the Solwara 1 alone should give this kind of profit with a healthy margin for error.
Yes, there are some very big IFs since this is a pioneering project. There are also big risks that the whole concept of underwater mining comes under attack for environmental or other reasons although the company claims that the environmental and social impacts are smaller than those associated with conventional land based mines. Also, between now and the completion of the mine, the company will have negative cash flow (Q1 2010: -13,3 million USD) due to exploration and other operating costs that are not related to mineral extraction from Solwara 1.
Solwara 1 was granted environmental permit in December 2009 and the company is expecting to have the mining lease in place during 2010. The company has over 450.000 square kilometers of tenements in five jurisdictions. There are many other high grade mineral deposits already found besides the Solwara 1.
Recently the stock has gained a lot and has been trading with wild daily swings up and down.