Nautilus settles dispute with PNG government

VANCOUVER — Shares of Nautilus Minerals (TSX: NUS; US-OTC: NUSMF) have been on the rise following an agreement with the Papua New Guinean (PNG) government that allows for the mining of the company’s Solwara 1 undersea polymetallic project.

Nautilus is planning to mine high-grade sea floor massive-sulphide systems 30 km from PNG’s coastline and within its territorial waters. In March 2011 the PNG government signed an option to acquire a 30% stake in Solwara 1 in exchange for covering 30% of the project’s costs leading up to the date, as well as 30% of any future costs.

A dispute arose in mid-2012 when Nautilus claimed it had yet to receive any funds from the PNG government. A “resolution” process concluded on Oct. 3, 2013, when an arbitrator ordered the state to comply with its obligations under the project agreement. The ruling dictated that the PNG authorities issue payment by Oct. 23, 2013, with the company estimating the total amount payable at US$118 million.

Nautilus reported it did not receive funds by the deadline, and opted to terminate its agreement with PNG in accordance with the option conditions. It took another two months, but on April 24 the company announced it had independently resolved the issue and signed a new agreement with the government.

“We know everyone would like to see things happen more quickly,” president and CEO Michael Johnston said in a phone interview, noting that the deal is close in value to the arbitration ruling.

“But PNG is a prospective place with a lot of large projects under consideration in the mineral and energy sectors, so a lot of the time we had to literally ‘take a number’ to undertake those discussions,” he added. “The people very much want to be active participants in the country’s resource development, and we’ve been trying to help them achieve that. That being said, when there are billions of dollars of potential resource investment, the government has to be mindful with these partnership agreements.”

Under the redesigned option, PNG will take an initial 15% stake in the project. The government can opt to take up to another 15% interest within one year of signing, and will pay Nautilus a non-refundable deposit for its initial 15% interest of US$7 million. The agreement is also conditional on the government securing its 15% share of the requisite development capital — which is pegged at US$113 million — by the end of July.

“It’s been in the media over here that after the government signed the agreements with us, they signed the finance agreements with Bank South Pacific for the full investment amount for this deal. There may be a little bit of administrative tape to get through, but for my money it looks like the funds are on the way,” Johnston said.

Meanwhile, Nautilus has been developing its sea-floor production tools, which include a bulk cutter, auxiliary cutter and collecting machine. The excavation and collection process is being split into three stages, which wouldl each be carried out by a different vehicle.

The auxiliary cutter is designated as a “pioneering machine,” which prepares the seabed for the more powerful bulk cutter. The two machines gather excavated material, while the collecting machine would harvest the cut material by drawing it in as sea-water slurry with internal pumps and pushing it through a flexible pipe to the subsea pump, and on to the production ship using a riser system.

Solwara 1 is found 1,600 metres below the surface of the Bismarck Sea. It hosts indicated resources of 1 million tonnes grading 7.2% copper, 5 grams gold per tonne, 23 grams silver and 0.4% zinc. Inferred resources add 1.5 million tonnes of 8.1% copper, 6.4 grams gold, 34 grams silver and 0.9% zinc.

“The timeline moving forward will be dictated by the vessel contract,” Johnston said. “We’re in discussions with ship builders at the moment, and there’s a tender process underway. One of the conditions of the deal for us is securing a vessel that meets the specifications the joint venture has agreed on. Once we have the contract sorted out it will take between two and three years to build, though we won’t know the final time frame on that until we get the quotes in from the yard we select. Our goal is to have the contract signed by year-end.”

Nautilus shares jumped 70%, or 16.5¢, after the news before closing near a 52-week high at 40¢ at press time, on 5.4 million shares traded. The company has 441 million shares outstanding for a $176.3-million market capitalization. The company reported working capital of $36 million at the end of 2013 after closing a $40-million rights offering in mid-June, wherein it issued 200 million shares at 20¢ per share.