Starting the world’s first seabed mining operation was never going to be simple, but for TSX-listed Nautilus Minerals, the challenges have been multiplying.
The logistics of commercially mining 1.6 km below sea level — which would seem like the most obvious difficulty — has not been one of its main barriers. Instead, trouble has come from: a disagreement with the Papua New Guinea (PNG) government, in whose waters Nautilus plans to mine; financing issues for its ship-building partner in Europe; and growing concern over the environmental implications of the whole endeavour.
As to the mining itself, while still untested in full production, Nautilus is confident it has solved the technical hurdles and is well on its way to having the project ready to go. At the end of June the company was just over halfway to finishing the seafloor production equipment, and recently started working on the pump assembly that would bring the material to surface. The company is targeting late 2013 for a production start-up.
The company is also adding to the potential of Solwara 1, the first of many targets in PNG’s Bismark Sea that it hopes to mine. As of a November 2011 update, Solwara 1 hosts an indicated resource of 1 million tonnes grading 7.2% copper, 5 grams gold per tonne, 23 grams silver per tonne and 0.4% zinc, while inferred resources stand at 1.5 million tonnes grading 8.1% copper, 6.4 grams gold, 34 grams silver and 0.9% zinc.
And Nautilus has a ready buyer for the material after signing a binding offtake agreement with China-based Tongling Nonferrous Metals Group for 1.1 million tonnes of material per year for three years.
But while the technical aspects advance, cracks are appearing in the company’s business relations with the PNG government. Early last year the government decided it would take a 30% stake in the Solwara 1 project, for which it would pay $24 million in sunk costs and 30% of costs thereafter. The government, however, has yet to pay Nautilus anything, and as of early July the total bill stood at $47 million.
PNG says it won’t pay because Nautilus has not met obligations in the equity option agreement, is in breach of the agreement and says that the state is entitled to terminate the agreement. Nautilus disagrees.
“Let it be said that we don’t believe the allegations against us are correct or valid,” Stephen Rogers, president and CEO of Nautilus, says by phone from Brisbane. “We do think this is something they’re using as leverage to get better conditions . . . it’s quite frustrating.”
Because of confidentiality agreements neither Nautilus nor the government have disclosed the obligations that Nautilus has apparently not met.
The disagreement is now in arbitration — expected to take three months at a minimum — so Nautilus is hoping to resolve the issue outside of the process.
“I believe there is a very good chance we will be able to resolve this amicably without waiting for the arbitration outcome,” Rogers says. “I’m upset and disappointed, but I believe we’ll be able to get things back on track.”
But with no money forthcoming from PNG until the disagreement is resolved, Nautilus has raised $34 million in a non-brokered private placement with its major existing shareholders.
The placement, at 90¢ a share, is a far cry from the $2 price its shares were trading at just before the dispute emerged, and even further off the $3.60 the company traded at in early 2011 when it first secured the mining lease.
Rogers says the financing was necessary, despite the company having $87 million in cash at the end of June, because the company wanted to make sure the project was not shut down.
“It’s far from desirable to do at the low price we’ve got today,” Rogers says, “but we wanted a bit of comfort in our capital capacity to be sure that, if it took longer than we thought to resolve the matter, we could carry on with the building of the equipment.”
The dispute has been complicated by the protracted PNG election process that started in June and saw Peter O’Neill declared prime minister in early August. But with the new government now formed, Rogers says the situation is looking more stable.
“What we’ve seen here is a unique situation that’s really come about due to some of the political instability that’s existed over the last six months,” Rogers says. “Prior to that the former government had been in place four or five years, and we had enjoyed positive relations with the government throughout that period. I’m expecting that stability to restore, and — whilst it takes time for things to process in PNG — typically in the past it’s been a reliable place to do business.”
Outside of PNG, the other concern for Nautilus is that its ship-building partner, Harren & Partner, can no longer put up as much equity to build the ship as it originally planned because of tightened banking rules in Europe. Already the vessel construction is behind, having been scheduled to start in early June, but both Nautilus and Harren are working to find a financing solution through alternate sources, and looking at ways to make up the lost time.
And there are the environmental concerns. The company secured its environmental permit in late 2009, but as the project gains attention more critics of the plan are emerging.
PNG newspaper the National has quoted Marius Soiat, chairman of mining and infrastructure for the New Ireland province near Solwara 1, as saying that “Nautilus may have a mining lease . . . but we have just begun to fight,” and that “the environmental impact statement Nautilus did is deeply flawed, and has been criticized as deficient and misleading by several international experts . . . the people of New Ireland do not want seabed mining in our province.”
Just the day before, MP and governor of Oro province Gary Juffa was quoted by the National for raising concerns over the project, saying: “I will suggest to the prime minister and the government to put a stop to this and a thorough research and study be carried out first before any decision be made.” And shortly before that the new speaker of PNG’s parliament Theo Zuranuoc described the project as destructive, and called on people to “drown Nautilus forever,” according to the blog Papua New Guinea Mine Watch.
Politicians are joined by local and non-governmental organizations, including the Deep Sea Mining campaign, Friends of the Earth Australia, Mining Watch Canada and local PNG groups, and have started the campaign to halt the Solwara 1 project and any other deep-sea mining operations in the Pacific. The campaign put out a report highlighting the risks of deep-sea mining, especially the threats to the unique ecology of hydrothermal vents and the general uncertainty surrounding potential impacts.
Rogers, however, says that the company enjoys strong support in the country and its environmental program is sound, and that most opposition comes from those who don’t fully understand what the company plans to do.
“We have gained a lot of support in Papua New Guinea,” Rogers says. “Our environmental assessment was a thorough job, we set a really good benchmark, I think, for the new industry.”
Rogers cited measures such as the refuge sites in the mine area and a reference site 2 km away as part of the plan to regenerate the site and minimize any long-term impact, while the company’s plans to pump any seafloor water lifted up straight back to the bottom will ensure other ecosystems aren’t affected.
“We believe the environmental impact is minimal,” Rogers says. &ldqu
o;We’re not impacting fishing . . . everything is contained in the lower levels of the ocean.”
Rogers also pointed to the much smaller overall footprint of the operation compared with land-based mining, with Solwara 1 covering 11 hectares, thanks to the high-grade nature of the deposit.
“There are a lot of misconceptions about what we’re doing, and people are fueling fear, I would say,” Rogers comments.
But he is confident the project will go forward — and despite wranglings with the government, he has faith Nautilus can work with the newly formed government.
“Generally our relationship remains quite positive with the government,” Rogers says.
“We’re expecting that we can pick up that good relationship and try to get things back on an even keel.”
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