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The share price of Nautilus Minerals (LSE:NUS) has had more peaks and valleys in the five and one-half years it has been listed on the London Exchange than the topography of the ocean floors that it explores. Company shares have been in steep decline since peaking at 168.00 on 30 March. NUS closed yesterday at 51.50, but an announcement this morning drove the price to match its one-year low of 27.00 today. In the last three years the company stock has been as high as 224.00 Unless something very significant happens to boost investor confidence, it’s likely to be quite some time before the share price reaches those heights again. At the end of September the company’s market cap was £130.5 million. This afternoon it stands at £61.9 million.
Too Many Eggs in One Basket
Nautilus is engaged in underwater exploration of minerals. It designs and builds its own custom equipment for delivering discovered deposits from the ocean floor to the surface. It holds “more than 500,000 square kilometres of tenement applications, in Papua New Guinea, Tonga, Fiji, Vanuatu, the Solomon Islands, New Zealand and the Central Pacific, and has secured some of the most prospective areas of seafloor for the potential development of future projects. Previous exploration has already identified 19 mineralised seafloor systems in the Bismarck Sea, and 16 in Tonga.”
However, it has been actively involved in only one project, the Salwara 1, off the coast of Papua New Guinea, and that has been nothing but trouble. Recognising the richness of resources at the Salwara site, Nautilus engaged in an agreement with the government of Papua New Guinea to share $23.5 million (£14.8 million) of the development costs of the venture incurred up to January 2012. The contract also required a government contribution of $51.5 million (£32.4 million) by 30 September 2012. The government has not only not paid the latter amount, but also has claimed that it is under no obligation to do so. Nautilus has, therefore had to bear 100% of the development costs for the period ending 30 September.
What Now?
Following intense but unproductive negotiations with the government, Nautilus’ announcement today was that they were terminating the construction of their Seafloor Production System (SPS), which is, essentially, the heart and soul of the company. The obvious and stated reason for doing so was to preserve the company’s cash. This decision no doubt is part and parcel of the recent appointment of Mike Johnston as interim President and CEO and his mandate to keep the company from sinking (pun intended) more money into the project to avoid it eventually sinking the entire ship.
The company has no reason to continuing building its SPS, unless it has some place to use it. Whilst Salwara once looked like the place, Nautilus has no option of its own but to pursue one of its other sites. The most likely site may be off the shores of Tonga, as initial research seems to indicate a high potentional existing there. However, the risk is probably now even greater and the wiggle room even less. If Nautilus were to proceed with Tonga, or any other site, it is going to need some financial assistance, because it is in no position to go it alone. If this assistance, even in part, were to come from the Tonga government, you can rest assured that any contracts will be iron-clad.
Two other possibilities come to mind as well. By walking away from Salwara, Nautilus may gain the attention of the mule-ish PNG government, secure the $51.5 million due, and move ahead from there. Given that all available funds have already been sunk (I hate using that term in this story) into the SPS, yet leaving it without being fully developed, a takeover proposition might be possible. Anglo-American, for instance, already has an 11% stake in Nautilus, but is not the largest of the investors.
It is possible that Nautilus could close up shop, but not likely. The company has a proprietary technology developed to an advanced stag,e and the potential for reward by continuing the development and use of the SPS is substantial, especially when considering the richness of undersea mineral deposits compared to land deposits. Going forward will be very risking, but it may also be exponentially rewarding for those who can afford to stay with it.
