Sunday, March 13, 2016

Risky, Riskier, Exploration stage mining company

A reader asked about my opinion on latest developments in Nautilus Minerals (TSX: NUS). Let me comment more broadly this types of very risky investments. For that I want to bring in Tasman Metals (TSX.V: TSM) and Talvivaara also in the discussion.

Talvivaara is a Finnish mining company that used to be listed in both London and Helsinki stock exchanges. I have been following developments of these three mining companies for many years.

Let's start with Talvivaara for three important learnings:

1) Never ever look into past valuation or past stock price (consider those meaningless no matter how compelling story there is about what treasures lie in underground/water). Many investors kept pouring money into Talvivaara as the stock plummeted probably thinking they are getting it at discount.

2) You can still loose lot of money even if you buy stock at very low unit prices (e.g below 0,10 which may seem dirt cheap). The fact that unit price is in "penny stock" range is warning sign in itself. It means since listing of the stock things have gone badly south.

3) Worst possible thing can happen. The operating subsidiary of Talvivaara (Talvivaara Sotkamo Ltd) was declared bankrupt on November 6th, 2014.

Fortunately, I sold our Talvivaara positions in May 2012 and took severe losses from those. However, this was still before the end game and got some 2 euros per stock (which we were luckily investing into Nokia which did prove to be a lot better bet for turnaround).

Which reminds me of my tendency to keep too many turnaound bets at the same time.
That's never wise since the odds - in general and across many cases - are against spectacular turnaround (so you can expect to loose most of the time).

Anyhow, it's good to keep in mind that Talvivaara was far beyond exploration stage. Yet it failed completely. They had their first (and only) mine in ramp-up stage. And then too many things went wrong (including macro environment around mining industry translating to less demand & lower prices for all metals).

The other two I am about to discuss are exploration stage. That translates to much much higher risk than Talvivaara as Talvivaara made it to production. Very few exploration stage properties ever get that far.

- Think about it! -

I have used many times in my posts about Nautilus Minerals term "lottery ticket".

In June 2011, the estimate was that if all goes well production may commence on site at the Solwara 1 Project in the last quarter 2013.

Now, the estimate seems to be Q1 2018. Almost five years have passed and still production is approximately 2 years away.

Time is money. No wonder they need to raise money - again.
Compare the amount of shares now issued (~687 million) to the amount of common shares company has outstanding (~446 million) and to what they had outstanding in June 2011 (~156 million) and you get idea of how much stock has been diluted along the way. I can imagine this is very typical in this type of companies. But it also means your share of the potential "treasure" is getting smaller and smaller.

On the positive side, they are making progress with the production equipment and system.

I made some estimations back in 2011 about the revenue that could be extracted from Solwara 1.
The estimate was done with following metal prices.
Cu $9000/t, Au $1500/oz, Ag $35/oz, Zn $2200/t

Most of the value of the project lies in copper. The price of copper (Cu) is now under $5000.
Also Gold (Au) is below (now less than $1300/oz).

Any calculations I made about stock price level can be ignored (as company will much more shares at potential production stage than I estimated at the time).

Capital required to get into production has also ballooned over the course of the project.
I haven't looked at the latest prospectus on how much it's now.

The project is very risky. When in production they will have (to my recollection) only one production system. Any part of that system malfunctions and they are burning cash without producing.

Finally, let's look at the third example: Tasman Metals (TSX.V: TSM).

In mid 2013 things were still looking good. Tasman Metals was granted mining lease for it's flagship Norra Kärr heavy rare earth element (REE) project in Sweden. At that point in time the estimate was that mine construction could start late 2014 and produduction during 2016.

Didn't happen.

Recently Swedish Supreme Administrative Court canceled the Mining Lease for Norra Karr project. The company still holds Exploration License which it tries to extend. Tasman Metals have told they will curtail expenditure on the project and have decided not to renew exploration licenses for their smaller Swedish REE project (Olserum).

The stakes we once had in Nautilus Minerals and Tasman Metals have melted down to tiny ones.
I am keeping both for now for the fun of it. Until things start to look better in the mining industry as a whole, I do not want to increase our current (tiny) stakes in these companies.


  1. Many thanks for the update. This is much appreciated. Personally, I view the conclusion of the recent rights offering as a new low in the Nautilus saga.

    Papua New Guinea already made it clear last year that they were not willing to raise their stakes and so have two of the three major shareholders in the context of this rights offering.

    I don't know how many private investors participated but the number seems negligible. It inevitably appears that the endgame is now fast approaching for Nautilus Minerals, despite recent progress in the construction of the various pieces of equipment.

  2. Thank you for the analysis, UltraLong.

    What is your view of the outlook after the latest rights offering? What options does Nautilus Minerals realistically have at this point, and how would a potential solution impact shareholders?