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For the past five years, Nautilus Minerals (NUS-T) has been working to bring undersea mining from the theoretical realm to the practical. Now, there are only two things standing between Nautilus and opening up the new frontier of deepsea mining: a mining licence from the government of Papua New Guinea, and the cash to proceed with its unique plan. After laying low during the global recession and conserving its cash -- while continuing to work through the painstaking technical details of its Solwara 1 seafloor massive sulphide (SMS) project -- Nautilus saw some encouraging progress last year. In December, the company received an environmental licence for Solwara 1, which lies in the territorial waters of Papua New Guinea. While many investors may have dismissed Nautilus as a quirky curiosity when it had its IPO on the TSX Venture Exchange in May 2006 - despite a partnership at the time with Placer Dome, which picked up the early exploration costs at Solwara 1 -- analysts say the company could commission the first-ever subsea mining operation as soon as mid-2013. An independent definition and cost study, released at the end of June, outlined expected operating and capital costs for the project, and also projected that mining could begin within 30 months of securing funding. That funding is expected to come via a joint venture, says Stephen Rogers, Nautilus's CEO. "We're currently in negotiation with a variety of potential strategic partners that will bring in additional funding for us," Rogers said in a recent interview in Toronto. The company, which is sitting on US$196 million in cash and equivalents, needs another US$200 million to fund the venture, with capital costs expected to total US$383 million. That includes contracts to design and build specialized subsea mining equipment. The western Pacific Ocean has proven its bounty. The company has only one defined resource at Solwara 1, but it has found a total of 19 SMS systems in the waters of PNG. "Each time we go out on one of these programs, we're only out for a month or so at a time, so if I were to add up all of the seaborne time in Papua New Guinea, it may only add up to three or four months, and yet we've discovered 19 systems," Rogers says. "Some geologists work all their lives without discovering anything at all." The grades are high - averaging about 7% copper - and the systems right on the surface of the seafloor. Drilling in 2007 down to an average of only 8-10 metres defined an indicated resource of 870,000 tonnes grading 6.8% copper, 4.8 grams gold per tonne, 23 grams silver and 0.4% zinc. Inferred resources stand at 1.3 million tonnes grading 7.5% copper, 7.2 grams gold, 37 grams silver and 0.8% zinc. Rogers says that a US$7-million drill program planned for October will test Solwara 1 to 40 metres depth -- more than 40% of the drill holes in 2007 ended in mineralization -- and give Nautilus a better understanding of SMS deposits. "Our knowledge of the system is only veneer-thick at this point," Rogers says. "Most of these systems have a stockwork, a sort of central area where they started to build from, and we want to get an idea of where that stockwork is and how deep it might be." At Solwara 1, the mineralization has proven quite consistent - something that will make mine planning very easy, Rogers says. In anticipation of a mining licence, Nautlilus's contractor is at work building the specialized seafloor mining tools that will mine Solwara 1. That includes three machines (the Auxiliary Miner, Bulk Miner and Gathering Machine) that will cut and gather the mineralization, which Rogers says has a similar consistency to coal. Engineering work on the seafloor mining tools has been ongoing for more than two years under an US$84-million contract with Soil Machine Dynamics. The contract, which includes the design and build of the three machines, was suspended during the recession, with work resuming in March 2009. Under the proposed mining system, the Gathering Machine will collect material cut by the other two and transport it in the form of a slurry to the Riser and Lift system. From there, the slurry would travel up to a production support vessel, which Nautilus plans to contract rather than build. On the vessel, the slurry would go through a watering plant, with the water returned to the seafloor to minimize environmental impacts and the dewatered material transferred to a barge. The barge would take the material about 50 km to the Port of Rabaul, in PNG, where it would be stockpiled. Costs of unloading the barge and of subsequent treatment were not considered in the definition and cost study. The US$383-million capex estimate does not include the cost of building an onshore concentrator, but does include a 17.5% contingency. Nautilus has the option of building a treatment plant to sell concentrate, or selling the ore directly to a smelter. Operating costs were pegged at US$70 per tonne with production averaging 1.35 million tonnes per year. The building of the equipment other than the seafloor mining tools will proceed once the funding is place. Rogers points out that although the equipment has had to be designed and built to Nautilus's specifications, the machines are based on those that have performed similar functions in the offshore oil and gas industry. An engineer who has found working through the technical details of the project "fun," Rogers appears the perfect person to head up such a project - unwilling to indulge any attempts to characterize the project as out of the ordinary, even sci-fi fare. "I think people are starting to understand that all we're doing is taking existing technologies used in the offshore oil and gas industries, and applying them in this new sector," he says. "But whenever you have robotics at work, people still see it as a little bit space-age," He adds, however, that subsea deepwater robotics have been around for some 25 to 30 years and can work at depths of greater than 4,500 metres. Solwara 1 is only at 1,500-1,600 metres. "It's not really rocket science anymore," he insists. Despite the novelty of the project - or rather because of it -- Nautilus does not plan to complete a feasibility study on Solwara 1 before moving ahead. The definition and cost study was based on a mine plan that included inferred resources, and does not show whether the operation will be economic or not. "We've got every confidence that we have sufficient material on the seafloor for us to go ahead and start the development of our production system," Rogers says. "The definition and cost study that we released is probably the most formal documentation that we will make available publicly." In terms of offshore operating and capital costs, the independent study provides a good idea of these, Rogers says, while investors already have a good idea of the land-based aspects of the project. "The whole economic proposition is very different from conventional land-based mining, it's an aggregation model where we build one production system and then we move from one cluster of deposits to the next." Rogers says that will allow the company to mine new deposits, regardless of their size, at very little incremental cost. "So it's a very different economic equation and it doesn't lend itself to a conventional feasibility study for that reason." Raymond Goldie, senior mining analyst at Salman Partners, doesn't see a problem with Nautilus's plan to forgo a feasibility study. "I think it's the right decision under the circumstances because they're dealing with technology that is so difficult to evaluate without actually building it -- it's going to be just as cheap to build a working commercial plant as it would be to model it," he says. More problematic for some Salman Partners clients, he says, is the company's lack of reserves. Nautilus has only a defined and indicated resource on one of its PNG deposits - Solwara 1. Goldie himself doesn't believe the company will run out of deposits to mine. "I really don't have an issue there because they've found 17 of these things. So if one of them hasn't got quite what they expected, they don't have to dig another hole, they just move the ship few kilometres and keep going on the next one." Goldie says the company has identified the technological aspect as the most challenging part of advancing Solwara 1. "In terms of the technology, it's all off the shelf," he says. "So the real key is can all those different off-the-shelf technologies work together." Brent Cook, an analyst and the editor of Exploration Insights, isn't so sure they will. Cook, who warns that the capex and other costs are based on the assumption that the technology will work properly, calls Solwara 1 "an interesting science project," but says it will take a long time to iron out the inevitable wrinkles of working in such a novel environment. "It's hard to make money on a VMS deposit sitting on land," he says. "It's not going to go smooth, for sure." Rogers, who spent 15 years heading up organizations that do construction work on the deep ocean floor before joining Nautilus as chief operating officer in 2007 (moving into his current role in 2008), may be having some success convincing institutional and retail investors that it could work. The company's share price has soared on high volumes over the past two weeks, gaining 76% since the end of June to a $2.62 close on July 12. The stock has since come back to earth trading at $2.02 today. The rise followed the release of a definition and cost study in late June followed by a North American investment roadshow by Rogers, who is based in Brisbane, Australia. In addition, a highly promotional plug in a newsletter by Stansberry & Associates in the U.S. helped propel the stock, although it didn't name the company specifically. (Stansberry offered a report with all the details of the company and project to those who signed up for paid subscriptions to one of its investment newsletters.) Salman Partners' Goldie rates the stock as a "buy," with a June 24 research note calling for a 12-month target of $5.10. Numis Securities analyst Andy Davidson is a little more conservative with a research note the same day calling for a target price of £1.70 ($2.66). (Nautilus is dual listed in Toronto and on London's AIM.) SMS deposits are the equivalent to Canada's volcanogenic massive sulphide (VMS) belts, only they're much younger - tens of thousands of years old rather than millions. The deposits form through hydrothermal activity: cold water seeps down through rifts in the ocean floor all the way to the earth's mantle. It then becomes superheated and rises back up, leaching out metals along way. Once the mineral-rich hydrothermal fluid comes back to surface, it's around 350-400 degrees C, and when it makes contact with the 2-3 degree cold waters, the solids precipitate out, forming mineral-bearing rock right on the surface of the seafloor. When the hydrothermal vents are active they're called "black smokers." Solwara 1 is a good 2-3 km away from any active black smokers, the company says. This fall, in addition to work at Solwara 1, Nautilus will also drill scout holes on some of its other Bismarck Sea discoveries -- a couple of systems within the mining lease area and new systems that have returned good results from surface sampling. Nautilus also has exploration tenements in the waters around Tonga and Fiji, and elsewhere in the southwest Pacific totalling 450,000 sq. km. The company boasts some heavy hitter shareholders: Anglo American (AAL-L) at 11.1%, Teck Resources (TCK-T) at 6.8%, Barrick Gold (ABX-T) 1.9%, and Russia's Metalloinvest holds 21% through Gazmetall Holding.
