Nautilus using down time to improve Solwara 1 plans

Vancouver – Construction of its novel deep-sea mining equipment has been on hold since December but Nautilus Minerals (NUS-T) is seeing opportunity rather than disappointment in its delay: the company has spent the last four months revamping its Solwara 1 project to capitalize on the cost savings opportunities presented by the economic downturn.

The company has not yet completed an economic study on Solwara 1 but the company says it expects operating costs for the off-shore production system to fall in the range of US$50 to US$65 per tonne. The estimate is based on a targeted production rate of 1.2 to 1.6 million tonnes annually. The initial estimate for Solwara, which is in the Bismarck Sea in the coastal waters of Papua New Guinea, pegged indicated resources at 870,000 tonnes grading 6.8% copper, 4.8 grams gold per tonne, 23 grams silver per tonne, and 0.4% zinc. Inferred resources currently add 1.3 million tonnes averaging 7.5% copper, 7.2 grams gold, 37 grams silver, and 0.8% zinc.

Nautilus’ CEO, Stephen Rogers, says the project has been “markedly enhanced as a result of the cost reduction and optimization work” completed in the last four months. Rogers also says the company is in talks with several parties interested in participating in developing Solwara 1.

In mid-2008 Nautilus inked a deal with North Sea Shipping to supply the specialized mining support vessel needed for the project. The Norwegian company agreed to provide a 160-metre specialist ship on a 5-year charter basis, with options to extend. Over the first five years the contract was worth US$125 million.

But in December, with the economic downturn forcing the company’s market capitalization below its cash on hand, Nautilus delayed all project construction and cancelled the ship contract. The company had ensured all of its supplier agreement contained provisions for cancellation without penalty.

Now Rogers says the company has several new options with respect to the mining support vessel that offer significant savings and technical benefits to the project. The company is aiming to sign a new deal for a ship by the middle of this year.

Another interesting technical development that has come about because of the delay relates to how to hold the ship in position while mining. Until recently the company assumed the vessel would be dynamically positioned; that is, the ships; engines would be used to maintain its position over the ocean bottom. Now Nautilus is investigating the viability of using a single, preset deepwater mooring spread – essentially an anchor – to hold the vessel on station, which would reduce operating costs by as much as 10% because of the fuel savings. The anchor idea could only come about once the company better understood the traverse requirements of the sea floor mining tool and the behaviours of the riser system, which brings the slurry to surface.

Nautilus also commissioned a riser optimization and cost-savings analysis, which will examine riser sizing and equipment sourcing to take advantage of the significant drop in global steel prices. The results of that study are expected in the third quarter.

And a 31-hole drilling program in late 2008 revealed a new, high grade base and precious metal zone just 250 metres north of the defined resource at Solwara 1. The North zone, as it has been dubbed, saw three drill holes that all returned massive sulphide mineralization from surface. Hole 149 returned 1 metre grading 12.88% copper, 20.56 grams gold, 121 grams silver, and 0.37% zinc. Hole 162 cut 1.3 metres grading 9.07% copper, 16.84 grams gold, 124 grams silver, and 2.48% zinc.

The majority of the drill program was focused on EL1196, the formal name of the exploration permit encompassing Solwara 1, the new North zone, and several other Nautilus targets. Solwara 1 saw 15 infill holes that returned the short, high-grade results expected.

Core recovery in the program averaged only 41%, significantly lower than in the 2007 program because of variation in material over the range of sites tested and operator inexperience in the short program. Regardless, the program accomplished its task, which was to rapidly test a series of weak electromagnetic (EM) anomalies and sulphide outcrops identified in dives during 2007 and 2008.

Nautilus’ share price currently sits near $1.30. The company has a 52-week trading range of 73¢ to $2.98, 156 million shares outstanding, and US$215 million in the bank.