Nautilus gets sinking feeling

Vancouver — Shares of aspiring seafloor miner Nautilus Minerals (NUS-V, NUSMF-O, NUS-L) slipped to a several-month low recently following news that a works contract with its tentative development partner, Belgium-based firm Jan De Nul Group, lapsed in early July.

Nautilus and Jan De Nul had entered a “heads of agreement” in October 2006 that would have led to the Belgian company building a 191-metre vessel to serve as a mining platform for operations at the Solwara 1 seafloor massive sulphide project, located off the coast of Papua New Guinea in the south Pacific.

As the July 1st deadline approached without a formal agreement, Nautilus sought an extension to continue negotiating with Jan De Nul. With an apparent extension in hand, Nautilus says it continued discussions. The company then received notice from Jan De Nul on July 6th that it did not sign the extension letter.

Instead, Jan De Nul proposed new terms that would see certain development costs offloaded onto Nautilus. As Jan De Nul was to have borne the costs for the vessel under the earlier agreement, Nautilus declined the new terms and announced the lapse of the agreement.

The news places a major capital item onto Nautilus, forcing the company to evaluate its options. Nautilus says it plans to deal directly with prospective suppliers of the specialized equipment.

“Whilst the agreement with Jan de Nul called for the construction of a new build ship, the company is now scoping other mining platforms, including the modification of existing vessels and barges to suit its planned production rates and development timeline,” said Nautilus CEO David Heydon.

Solwara hosts seafloor deposits, at depths of up to 1,700 metres, of precious and base metal-rich massive sulphides formed from recently active “black smokers” or volcanic vents. The sulphide bodies contain significant grades of gold, silver, copper, zinc and lead.

Proposed mining plans see mineralized material dredged from the seafloor, pumped to the surface vessel and then transferred onto barges for transport to a land-based concentrator producing a gold-rich copper concentrate for shipment to a smelter.

Nautilus has raised more than US$260 million through a series of financings over the past several months. On the prospect of successfully proving the feasibility of seafloor mining, a number of senior companies have taken positions in the junior, including Anglo American (AAUK-Q, AAL-L) with a 6.4% interest, Teck Cominco (TCK.B-T, TCK-N) with 5.8%, and Epion Holdings, owning 16.8%. Epion is wholly owned by Alisher Usmanov, a prominent figure in Russia’s iron ore and steel industries.

Barrick Gold (ABX-T, ABX-N) also has a 3.7% stake in Nautilus as a legacy through its takeover of Placer Dome, which spent about US$12.2 million toward a 40% interest in the project. In mid-2006, Barrick elected to convert its interest into an equity stake in Nautilus.

Shares of Nautilus dropped 19% on the news, closing down 97 at $4.22 apiece. With its 130.2 million shares outstanding, the company posts a $550-million market capitalization and has a 52-week trading range of $1.84-$7.39.