Blue ocean thinking puts Nautilus Minerals on course for copper and gold production

When Anthony O'Sullivan joined Nautilus Minerals NUS in 2005 his expertise and earlier experiences in leading base metals exploration at mining giant BHP Billiton were put to the test. For Nautilus, and O'Sullivan, the years that followed were spent finding answers to the complex geological, engineering and financial challenges of drilling for copper and gold at 1,500 metres under the sea off the coast of Papua New Guinea. Bringing together the best expertise in international mining and offshore oil and gas exploration – together with a mining lease that was finally issued this month – Nautilus is now closing in on plans to begin production.

Shares in the AIM and TSX listed company have soared since the start of 2011. A flow of promising results from ongoing test drilling and the all important issuance of a 59 sq km mining lease (on a ground holding twice the size of the UK) have driven the Nautilus Minerals share price from 144p to 201p in just four weeks in London. In Toronto the price has moved from $2.15 to $3.25 over the same period, with investors getting excited about the regulatory go-ahead for Nautilus to begin work.

As chief operations officer, O'Sullivan is modest about the huge obstacles that Nautilus has overcome in proving that deep water mining is viable. In an industry where base metals exploration is becoming an increasingly fruitless business, the implications for Nautilus achieving production from its Solwara 1 project, 30km from land in the Bismarck Sea, could be significant. Indeed, shareholders including Anglo American AAL and Teck Resources TCK have been keen to encourage the development and adaption of technologies to ensure that the company can make its blue ocean strategy a success.

Anthony, you joined Nautilus in 2005 from BHP. What was your view of the mineral exploration industry at that time?

When I was at BHP Billiton BLT , one of the things that I was in charge of was the metal exploration programme for about five years and in that time we didn't really find much. Since I left, and it has been a bit more than five years, they still haven't found very much. So when you've got the world's biggest mining company with all the resources, databases and people, and you can't find resources on land that says it is getting pretty tough. Since I've been with Nautilus we've found 35 deposits, or thereabouts.

What was the background to Nautilus and how did it identify and secure this ground holding in Papua New Guinea?

It really started off with marine scientific research groups. The US, Australian, Canadian, French, German, Russian, Chinese governments were all surveying the deep oceans and looking for these systems, largely in the interest of science. They found one of these deposits in Papua New Guinea and it turned out to be a very good grade and it was in a good location. The company's founder, Julian Malnic, cottoned on that this might be more than just a scientific curiosity; it might actually be a deposit. So he applied for the licences and our current chairman, Geoff Loudon, then became involved. He was chairman of Niugini Mining Ltd at the time, which was later acquired by Lihir Gold [which was acquired by Newcrest NCM last year]. In 1997 he helped steer the company through the PNG approval process to get the first exploration licence. That year Nautilus made the front page of the New York Times – it was the first time that this sort of thing had been granted anywhere in the world.

How did you decide that production from these resources was feasible?

Between 1999 and 2004 the minerals industry was in a pretty bad state, so nothing much really happened. Then in about 2002-2003 the previous CEO, David Heydon, came on board and really put a business plan around it. He brought in a technology consortium of various different oil industry players to look at what technology existed and what could be done. There was a report put together looking at whether it was technically feasible to do sub-sea mining and, if it was, whether it would be economically feasible and who held the technology that would be required. The outcome of that study basically confirmed that it was technically feasible and at 2003 metal prices it was economically feasible as well. The key players were the builders of various equipment who are now, to some degree, suppliers to the project. David then put those people, the engineers and geologists, together.

I came on board late 2005. We did the first serious drilling campaign in 2006, listed in Toronto in May 2006 and then did a number of the strategic shareholder deals with Anglo American, Teck and Gazmetall. We then did the London listing in 2007 and put together some of the key equipment contracts in 2008. The world fell apart in 2008 so we slowed down; we had a big whack of cash on the balance sheet and decided it was prudent to rein everything in. During the last year we've been reigniting it and slowly, as the markets have been coming good, getting it going to the point where we got the environmental permit issued in 2009. We have now been granted the Mining Licence. With that, there are a number of deals that we are close to finalising to get the vessel in place. Once that is done we are 30 months from first haul.

You have got some high profile industry shareholders on board – the likes of Gazmetall, Anglo American and Teck Resources. What advantage has that been for the company?

I've got different relationships with different shareholders. Gazmetall are a strategic shareholder, they have a seat on the Board and their main interest really is in the upside and, on a share price basis, what the value that Nautilus can create. Teck and Anglo American have different relationships. We have a technical collaboration agreement with Anglo and they have a secondee in Nautilus, working with our development teams on various issues and problems. To some degree that is a gateway into Anglo for a two way exchange of information and problems. We have a process where we provide them our problems and say: ‘This is something that we'd like solved' and then Anglo has a think about it and says: ‘We can help' or ‘We can't help', so it's very good.

Teck were very interested in exploration joint ventures; they had certain exploration rights in PNG and Tonga and spent some $14m in exploration and found a number of deposits. When they hit problems in 2008 they couldn't participate in their joint venture under the obligations so a number of them fell away but they still have some rights to yet-to-be-granted titles in New Zealand and also in Fiji. So we really do hope that when those titles are granted that Teck comes in again because they are brilliant at exploring. At one stage there were parallel exploration teams, the Teck group and our guys, and there was a healthy competition between them. They championed a number of technologies, particularly on some of the geochemical approaches, and we were championing geophysics. The two teams crossed deadlines and really got it done faster than either one of them could have done by itself. I think we have had a very positive relationship with all of those strategic shareholders.

Is there a sense in the wider industry that deep sea mining is something that needs to be looked at more closely?

I think most people would say yes but the question is whether that is in 100 years, 50 years, 10 years or today. It is really about the technology that you need to do it – and that technology largely exists today. What it needs is someone to put it together and make it happen, which is what Nautilus's whole game is about.

The big mining companies, and I know from my experience at BHP, typically have a strategy of fast follow up on technology. None of them really like to do it for the first time but they have the balance sheet and the wherewithal that once it's been done to move in and to take advantage of it or buy it. So I guess one of the things that we have to be mindful of is that once we have proven this, we have got a way of defending the value of it. The way we are doing that is by making sure that we've got large ground holdings. We won't get it all right but as long as we hold a big chunk of it then we make sure that we profit from proving the mining system.

Tell me about the ground holdings, the environment and how you rate the potential of your acreage?

We have got an area under title of 520,000 sq km, which is like one and half times the size of the state of California or two times the UK, so it is a pretty big chunk of ground. It is in 1,500 metres of water, so it's deep water but it's not ultra deep. The Bismarck Sea is one of the world's most quiescent seas. – it's at 3 degrees south, so it's on the Horse Latitude, or the Doldrums. The sea state data shows that only 3% of the time does a wave ever get over two metres. If you compare that to Namibia where De Beers are operating in the waters there, I think they've got something like 40% or 50% chance of 2 metres, so it gives you a feel for the difference in environment. It is 60km from the deep water port of Rabaul and 30km from the coast, so it's well situated but it is still far enough away that it is not that easy to get to from shore, so it's a good distance.

We have focused on areas that we think are prospective and the types of deposits that we are looking at, we call them sea-floor massive sulphide deposits, are really modern variants of a type of deposit called volcanogenic massive sulphides. That sort of deposit has been seen at Kidd Creek (copper deposit in northern Ontario, Canada) and Brunswick (zinc deposit in New Brunswick, Canada) and can be up to 100m tons each. Typically a deposit is of the order of 5m to 10m tons but they occur in districts and clusters and the districts are generally hundreds of millions of tons. So, you look at the sorts of grades that we're getting: 7% copper, 7 grams per ton of gold, in districts with hundreds of millions of tons and where you've got a mining system that is mobile. Once you finish mining a deposit you pick up all your equipment, sail over to another deposit, drop all your equipment and you can be in production again within days. It is a very different economic model. It is almost like what you see in agricultural areas, particularly in small-holdings, where farmers will grow crops and then you'll have a contract harvester who goes from one farm to another using that harvesting equipment on multiple farms. So it's almost that model where you can use that one set of harvesting equipment to go from deposit to deposit. Once you have invested your initial capital you don't have to amortise it all against one deposit, you can do it over multiple deposits.

In developing the mining process, what has been the most important part?

The main thing is grinding it up and making sure you get a good size distribution so that you can pump it up to the surface. That is where the real heart is and that is where we spend a lot of time with the likes of Sandvik SAND and Soil Machine Dynamics, making sure we get that right. The University of Delft has been involved in test work and we have done test work at Rowan and basically brought in a who's who to do various bits and pieces. If you ask our mining engineers, the worst part of it is they don't get to blow anything up – it seems to be in their genes.

How challenging has it been to adapt and develop these technologies?

The technologies being adapted are generally pretty mature and well understood. I guess, as a case in point, the Rovdrill 1 that we deployed to do the drill-out at Solwara 1 was a mating of an Atlas Copco ATCO underground drill rig with an offshore ROV (remote operated vehicle). From concept to operating system it was 14 months. Similarly we developed an electromagnetic mapping system to map the extent of the deposit. On all our diagrams you'll see a line showing the extent of the ore body and that was defined by the electronic magnetic survey. That was about the same length of time, 14 months from idea to operating system. It really comes down to the ROV technology, the control systems are very advanced, the umbilicals to provide the power are all in place, the motors are in place, the hydraulic power units and systems all exist, so it's really a matter then of putting the pieces together.

You have been looking for partners to bring into this project at some point. What sort of companies would you be looking for?

There are a number of ways of doing this and we have been talking to people about a number of possibilities. One of the routes that we have been looking at, and are still investigating with a number of players, is a direct project joint venture where a mining company comes in and joint ventures on the projects to help fund and manage them. We have also been looking at equipment supply joint ventures where we would enter into a joint venture with a vessel provider who supplies the vessel, the management capability, leasing arrangements and finance and Nautilus essentially builds a service company joint venture. On the back of that we could use it to mine our own deposits and potentially, in the future, when there's more of an industry, we could actually build a new mining service provider company potentially distinct from Nautilus. That would really be doing what the oil industry does. The majors basically focus on getting ground positions, evaluating the sub-sea and then the extraction and all the technology is largely run by the service companies. So we're looking to take that oil field model into the mineral industry.

Drilling at Solwara 1 is underway so what are your expectations and milestones over the course of this year?

We have got a process at the moment of shaking the equipment out and then once we have done that we expect some good news out in the market place. We expect the drilling campaign to be going on until early February and our focus really is to get better definition of the deposit and also to test the deeps and test some of the other systems that we have identified in the Bismarck Sea.

I have always said it is really a game changer. There has been a real advantage in that because it is such an interesting project we have managed to get the A Team on it. The sorts of guys that we've got involved, obviously you've got to pay them well, but they're doing it because of the challenge of it. You have got a body of different people all interchanging and that makes it a very exciting environment.

I work out of Brisbane, that's where our main development team is. We've got an office in Papua New Guinea, where the country manager is. He's got 35 years experience in public administration in the country and also with worked with companies like Barrick Gold ABX as their political representative. So quite a global reach; we've got suppliers in Newcastle in England, in Houston in the US and also in Perth in Australia, so it is quite a network of teams and that has being driven by going to best-in-class and basically dealing with the best in the world wherever they are.

Finally, how challenging has it been to win the confidence of investors?

I think the main thing was to get the over the hurdle of getting the mining lease in place and now we are away. Once we've got it proven we can say: ‘Here it is' and we can see that the sky's the limit – or the depth of the ocean is the limit. People talk of blue sky strategies in terms of corporate strategies; well this is a blue ocean strategy.

Thank you for talking to Stockopedia.

Thank you.

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