KIP KEEN | Mineweb
BACK in 2012 Nautilus Minerals was in the thick of developing a seafloor mining project in Papua New Guinea with the brief blessing of the state.
The PNG government had come aboard as a partner with Nautilus to help fund the construction of an underwater mine – a novel concept – targeting seafloor massive sulfide (SMS) deposits in early 2012.
But by the middle of that year the project foundered when the PNG government started a fight over contractual obligations with Nautilus including the rights to intellectual property, among other things.
Nautilus’ stock crumbled. It cancelled expensive ship and equipment building contracts. It halted intense exploration for additional SMS deposits. For the next two years Nautilus Minerals was in shackles, unable to meaningfully advance its aim to become the first real miner of metals from the seafloor.
The dispute took Nautilus Minerals – and its then newly appointed President and CEO Michael Johnston – down a worm-hole of negotiations and international arbitration. At times it looked like the dispute was intractable.
In late 2013 the PNG government ignored the arbitration judgement – which upheld that the PNG government had agreed to pay for a 30% stake in the Solwara I project, Nautilus’ leading underwater mine idea. No funds flowed by a deadline set by the judgement and seeing this Nautilus terminated the PNG government’s 30% buy-in right.
But in the background Johnston – about as even-keeled and low-key as CEOs come and a veteran of PNG mining – and his team continued meeting the PNG government and eventually sealed a new deal, much like the old.
The PNG government would have a two-stage 30% option on Solwara I, and it would pay $113 million for the first 15%. Nautilus in return would, as it had said it could, transfer a share of rights to intellectual property covering innovative technology that had been developed in the then, and still, nascent seafloor mining industry. Nautilus would also agree not to seek damages from the state stemming from the two-year long dispute.
Of course, ink on agreements like this doesn’t really dry until the money flows. It finally did in December and now Nautilus Minerals, and the potential of seafloor mining, are getting a reboot.
Johnston spoke with me recently about the agreement and the company’s plans. First off, he isn’t one to play the blame game. He’s not a high-tempered soul that, at least publicly or in interviews, lashes out at PNG for playing slow or sly.
Quite the opposite. He sounds understanding. For example, he recalls how the PNG government felt hoodwinked when a Placer Dome gold operation – in which it chose to participate as partner – ended up producing far more gold than was anticipated once in production.
“Look at it from the State’s point of view,” Johnston says. “If someone told you were going to produce 1 million ounces a year and you produce 1.5 million ounces a year, for two-three-four years, you might say it’s a reasonable position to feel like you were undersold on the project.” In this case the state forced the miners to yield to it a greater stake.
So PNG can be protective and pushy. Indeed, it forced Nautilus to renegotiate contracts with the junior’s suppliers to cut it in as a direct owner of some intellectual property rights covering seafloor mining systems.
But at the same time, Johnston argues, the PNG government is proving to be a willing partner, allowing numerous oil & gas projects to go ahead, and supporting mining projects as well, such as Solwara I.
“You’re going to see a lot of projects moving forward now,” Johnston says. “It’s not just our project.”
Which brings us to Solwara I. With the PNG government no longer holding it back, Nautilus is suddenly doing again what it has been trying to do for years: Develop and find more seafloor mining projects.
Solwara I – Nautilus’ most advanced project – is a gem, if quite modest in size. It’s a high-grade copper-gold deposit that Johnston now aims to have in production in 2018. Resources stand at 1mt @ 7.2% copper, 5.0 g/t gold, 23 g/t silver, 0.4 % zinc, indicated; and 1.5mt @ 8.1 % Cu, 6.4 g/t Au, 34 g/t Ag, 0.9% Zn, inferred.
The chief risk overhanging Nautilus is proof of concept as this kind of mining has never really been done before. This year Nautilus will start wet-testing much of its seafloor mining equipment, Johnston says. This means finding a suitable location to plunk its mining systems down, somewhere underwater but likely near shore, to test them out for bugs.
Meantime, Nautilus has entered into a contract to lease a mining vessel that a Chinese firm will soon start building. The systems are based around a lot of existing technology, so while this has to be considered a high-risk stock with lots yet to prove in its designs – there is also some real comfort in the fact that similar underwater industries have long used much of the technology in questions. This is not asteroid mining. It’s not outlandishly untried or untested.
Johnston views seafloor mining as doable and Solwara I as a place for it to refine its equipment to mine what could very well prove to be many more SMS deposits to come.
“What I think will happen – gazing into a crystal ball here – is these first machines will probably be the worst ones ever built,” he says.
“We’ll get a lot of learning, probably, from these first ones.” For example, Nautilus may find the cutter head design needs to be slightly different or the power requirements not so great or greater. It’s the more theoretical parts of the designs Nautilus will have to tweak.
“We’ve had to make a bunch of assumptions based on engineering work, particularly with regard to the hyperbaric effect, which is the weight of all that water. And it absorbs energy when you’re trying to cut the rock.”
His view is that they’ve been overly conservative on how hard, essentially, it will be to do the actual rock cutting underwater. The assumptions were based on core that was recovered – the harder, more continuous sticks of core. Are they representative, or do they undervalue more friable parts of the deposits which aren’t part of assumptions? “I suspect they probably aren’t representative,” Johnston says.
“I wouldn’t be at all surprised if we see that we’ve got to much power in the machines now. The next generation of equipment could probably be a bit smaller in terms of power requirements. Anyway, time will tell.”
Time will also tell how much potential lies in seafloor mining and by very direct extension Nautilus as a miner, which is leading the way in this untested arena. A lot of the potential lies in deposits like Solwara I – deposits from seafloor vents that dot regions where Earth’s tectonic plates meet. There are some 64,000 km of linear plate boundaries on the Planet, Johnston notes, and a lot of interest in their SMS deposits.
“The feedback I get is, if this works the way it’s supposed to, there’s going to be enormous interest in developing these things.” That interest comes from governments, miners and others such as smelters, Johnston says.
If Solwara I does work, we can expect that the next seafloor mines will be near Nautilus’ first. Indeed, the Solwara I mining license covers around 60-sq.-km of seafloor and Nautilus – before the dispute with PNG erupted – had identified numerous prospects worth following up.
There’s also other exploration concessions nearby where prospects – dozens of them – look good too. This year it will begin moving some of these – which in a few cases look similar to Solwara I – forward.
It’s no surprise. This kind of deposit, like their VMS (volcanogenic massive sulphide) brothers and sisters, tend to form in clusters. They can be very high grade, though they tend to be small tonnage-wise in comparison, say, to world-class porphyry deposits.
But, once in a while, like VMS deposits, they buck the trend. “Every now and then you get massive ones, like Kidd Creek,” Johnston says. “And even with the SMS’ known to date, in the mid-Atlantic a number of systems that have been identified by Russian researches are very large. They are claimed to be on the order of tens of millions of tonnes. There are some very large systems out there.”
Exploration for SMS deposits has also been fairly limited. Nautilus will restart its exploration program this year. It means rebuilding its geological team that was disbanded during the PNG-Solwara I dispute.
“We know we’re going to find lots of systems,” Johnston says. “We’ve already found something like 30 systems. Not all of those systems will be mined. What I say to some of the scientists that we meet: We would think something on the order of one out of 10 or 20 would probably be what you mine. Some of them are two small. Some of them the grade isn’t good enough. Some of them will be too active.”
If Solwara I works as Johnston expects, then Nautilus will presumably be able to line up more deposits to be mined. First these will come near Solwara I. But eventually, should other jurisdictions prove willing to allow seafloor mines, the possibility for a lucrative mining business to grow is obvious.
That is, as Johnston describes it, “to basically put a pipeline of projects together which we’ll just continue to mine.” It may mean significant additions to global metal supply. It may be somewhat disruptive, with smelters favouring new, higher grade, and possibly cleaner concentrates from the seafloor.
Time will tell.