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Nautilus value may be hidden in territorial security, not just deep sea mining
Nautilus Minerals (TSX: T.NUS, Stock Forum; 28 cents)
www.nautilusminerals.com
Shares outstanding: 238 million / Market cap: $69 million
Financials ending Sept 30th:
Cash & Equivalent: $92 million/Restricted Cash & Prepaids: $15 million
Equipment: $127 million/Mineral Properties: $54 million
Total Assets: $288 Million/Total Debt $14 Million
Nautilus is hoping to be the first deep sea mining company in the world. For the past couple years they have been developing and building proprietary deep sea mining equipment with its first high grade project located 30km off the coast of Papua New Guinea (PNG).
On November 13, the share price collapsed from 72 cents to 41 cents after announcing they were suspending their equipment build to conserve their large cash position during a dispute with the PNG government over equity, intellectual property and the environment. Since that time, the stock has been under constant selling pressure to a point now where it makes very little sense.
Most small stocks (especially resource related) have suffered a similar fate this past month but given the significant underlying asset value of Nautilus and the exceptionally strong shareholders, now may be a very good time to take a serious look at this company. Below I have explained in detail why butit starts with the strong balance sheet shown above.
A long report – but an intriguing 2013 speculation
This is one of those stocks that (at least on the surface) appears to offer exceptional value in the current price range. However, even with a crystal ball this market will lay waste to price targets and predictions so I will not even try and guess what this stock should be worth in 12 months (let alone the next three months).
Instead I will simply paint a picture of the story and the current valuation – and why, based on past experience, I believe there is substantial value here while a handful of existing shareholders dump paper and lock in huge losses.
The price made no sense at 35 cents and it makes even less sense at 28 cents. However, given the performance of small stocks in 2012, nothing surprises me. So if we get blind-sided with something negative the next month or two, all I can say isbuyer beware. Normally that is not a caveat I like to even consider but common sense investing does not seem to apply in this market.
If the market for small companies returns to something “remotely” normal, then there may be very good money made here. If they don’t, this may become dead (stagnant) money for months.
The strategy is relatively straight forward. You give them little to no value for the business model and simply pay for discounted cash and other physical assets. Often this strategy works if you have enough patience (and thick skin), but it is not bullet-proof.
Following the tech bust I was recommending at $1.40 a tech company in 2002 on NASDAQ called Marimba. Marimba had over $100 million in cash (worth $2 per share) and about $35 million in annual revenue. Yet at $1.40 you could not give that stock away - in fact you could buy all you wanted for months below $1.50 (30% less than the value of their cash).
By April 2004, BMC Software paid $240 million for Marimba at $8.25 per share. Very little fundamentally had changed with Marimba by 2004 but the broader market improved and in just over 18 months people could have made 500% with no risk. It was completely brainless money because of the large cash position and the fact Marimba controlled their burn rate and their technology was valued at zero.
The Marimba example simply demonstrates that very often the market is completely wrong on valuations and there is no rational logic behind a price when emotions are involved and investors are simply tired of a company or the market. They simply sell at whatever price to free up cash.
If Nautilus controls their cash burn, a positive scenario “should” emerge in 2013. If they don’t the large amount of stock outstanding will keep the price range bound. Below is the “story” and you can decide for yourself if it makes logical sense based upon your own investing style and risk tolerance.
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There is a lot more to Nautilus than mining rock at the bottom of the ocean - International Politics
Nautilus collapsed three weeks ago following problems with the government of Papua New Guinea (PNG). PNG has a long history of being difficult to deal with and I suspect Nautilus said “enough is enough” and terminated construction so that they could focus on other opportunities and pursue legal recourse to recover over $50 million owed them by the PNG government.
It is important to know that 49% of the stock outstanding is controlled by three International powerhouses; 1) Metalloinvest 21%; 2) Anglo American 11%; 3) MB Holding Company 17%.
Anglo American is one of the world's largest mining companies, Metalloinvest is a Russian iron ore giant controlled by Alisher Usmanov (Russia's richest man) and MB Holdings based in Oman does business in 20 countries with 6000 employees - it is controlled by Dr. Mohammed Ali Al Barwani who sits on the board of Nautilus.
Important insight from Stratfor
Stratfor (www.stratfor.com) is a global intelligence service that is very well respected and has a large international following.
Back in August they issued a very interesting report on "Sub Sea Mining." Because their content is copyright, I cannot repost it here, however I have summarized the most relevant points as I believe they pertain to Nautilus going forward.
- South Korea this year was awarded exclusive mineral rights to a 10,000 sq.km block of seabed in the central Indian Ocean. Seoul will retain those rights from 2013 to 2027. A period in which it is believed they could generate approx. $300 million annually in sub-sea mining revenue.
- For countries, deep-sea mining is a means of accessing and monitoring international or disputed waters. Aside from generating revenue, it serves a significant political purpose.
- According to the Stratfor report, "several private companies have shown a continued interest in deep-sea mineral exploration. The industry leader is Canadian firm Nautilus Minerals." In addition to the handful of private companies, China, Japan and South Korea are also pursuing the technology to deep-see mine.
- This process would allow China to extend its influence across the South China Sea, the East China Sea and the Indian Ocean. This year the International Seabed Authority approved China's bid to explore a 10,000 sq.km area in the SW Indian Ocean for 15 years.
- All of this becomes a serious threat to countries bordered by an ocean. As just one example, India is obviously threatened by China's movement in this area and is pursuing their own initiatives. For most of these countries it is about sovereignty and security. Far more important than the actual mining. France and Russia have also shown serious interest this year in sub-sea mining.
Many feel this industry will struggle to be profitable but no one has advanced far enough to know. While the mining has potential, I think it goes much deeper than profit - territorial security - as Stratfor has called it.
"Initial exploration becomes a useful political tool because it provides an excuse to operate in disputed or international waters."
Nautilus right now trades just below cash value but has invested years and over $100 million in studying this industry and building technology and equipment that will work best. If you view their presentation you will see significant advancements in design and fabrication to date.
https://www.nautilusminerals.com/i/pdf/webcast-nov-2012-FINAL.pdf
Obviously I could be wrong, but I feel confident we need to look at this company much deeper than just "mining." Only last week China announced new rules that would allow them to board vessels in territorial waters – even “disputed” territorial waters. This is of grave concern to many countries across Asia (Japan in particular).
In the years ahead territorial water and national security will take on greater importance globally (not just in Asia). Companies like Nautilus may provide the technology and equipment necessary to help enforce those territorial rights – but we have to hope they survive long enough to prove that point.
Nautilus has serious strength behind them with the three primary shareholders and I believe the points that Stratfor made (with this being more about politics) will eventually make Nautilus valuable again. Right now investors have an opportunity to pick away following a price collapse that in my opinion was grossly over-exaggerated.
In theory we will see more selling before Christmas (tax losses) but that will also create liquidity. I am personally prepared to tuck NUS away for 2013 – as I am doing with several of these cash-rich companies that have attractive (but grossly discounted) underlying assets.
https://www.nautilusminerals.com/i/pdf/webcast-nov-2012-FINAL.pdf
Go through their corporate presentation and you may see why this makes an attractive speculation near or below 30 cents.
On November 14, the CEO held a conference call and my notes are shown below:
- $34 million raised at 90 cents from all their major shareholders
- $91 million cash to the end of September
- Terminating PNG relationship allows them to move forward with Tonga (very large land position)
- Construction termination designed to preserve large cash position
- View photos on presentation - dramatic amount of work done to date - 53% complete - page 8-11
- Significant investment in design, engineering, fabrication, testing
- The company will update before the end of December
- Reasons for termination make perfect sense (PNG difficult country to deal with)
- Sea floor mining advantage is that equipment is built in a controlled factory environment (vs. land based mining builds)
- Costs capitalized on the books is in excess of $100 million
- Tonga potential significant (high-grade precious metal grades) - 19 systems / prospects
- Company has 600,000 sq.km of tenements in South Pacific
- Plan is to: maintain cash, discussions with PNG, maintain permits
- Tonga region a focus if PNG cannot be resolved
- New CEO sounded very confident and well spoken
Q&A from conference call listeners (there were limited questions so I summarized them here):
1) What is PNG arguing about - confidential so cannot discuss. State has contractual obligation of $23 million to date. PNG Government must pay their fair share of costs (independently audited and previously agreed upon). PNG also owes Nautilus $51 million associated with equipment built to date. No arbitration date has been set but they will update people as often as possible.
2) Ship status - discontinued discussions in light of PNG but many options available for ship design and finance. Ready to go when time is appropriate.
3) Is the equipment useable in Tonga or elsewhere - yes.
Discounting PNG’s importance
Currently the investment community is ignoring the strong underlying asset value of Nautilus and basing their valuation simply on the company’s relationship with Papua New Guinea (PNG) – it is important to put PNG into perspective. While it is a country rich in natural resources, it has a long history of questionable business ethics and corruption. In fact, annually PNG is ranked as one of the leading countries for corruption by Transparency International.
In addition, the Ease of Doing Business Index was created by the World Bank. It is based on the study of a country’s laws and regulations, with input and verification from over 9,000 government officials, lawyers, business consultants, accountants and other professionals in approx. 180 economies.
The "Doing Business 2012" report ranked Singapore #1 and PNG #101 (the U.S. is ranked #4 and Canada #13).
The problems with PNG will hopefully be resolved as Nautilus has spent a lot of time and money there. However, this should not be a deal breaker for the company.
Nautilus was likely tired of being bullied by the PNG government. And I am not sure where PNG expects they are going with this. Unlike traditional mining or oil & gas exploration, no one will be knocking on their door to mine the sub-sea floor 1km from shore – let alone 30km.
In addition to Teck, which owns 4.5% of Nautilus, the other three principal shareholders (who combined own 53.5%) are four of the most powerful partners/shareholders a small company could hope for. They are no doubt fed up with PNG’s games and have decided to look at alternatives. If Nautilus walks away from PNG, this government will have made a huge error in judgement – which given past history, may not be surprising.
The PNG government is looking a gift horse in the mouth. They had every opportunity to work closer with Nautilus and create taxation revenue and jobs. Now their greed may force Nautilus elsewhere and while it may mean short-term pain for shareholders, it could result in strong long-term gains if the right development partner is found.
After this many years in PNG, a person would hate to see that relationship go to waste. However, I don’t believe it should be viewed as a dagger in the heart of Nautilus (as we are seeing with the share price below 30 cents).
Dec 4th interviews from Radio Australia
This week the PNG Mining and Petroleum Conference was held in Sydney. Radio Australia did a couple interviews with the CEO of Nautilus. Those are available here:
1) https://www.radioaustralia.net.au/international/radio/program/pacific-beat/nautilus-ceo-confident-he-can-beat-environmental-activists-in-png/1055608
2) https://www.radioaustralia.net.au/international/2012-12-04/nautilus-confident-of-reconciling-with-png-government/1055674
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Disclosure: Danny Deadlock owns 70,000 shares of Nautilus Minerals (TSX: T.NUS) acquired in November, 2012. _______________________________________________________________________
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