Rare Earths in Pacific Ocean : Don't Get Too Excited

As much as US companies and policy makers are concerned about Chinese export controls on rare earth elements, a WSJ story about Japanese identification of deep-sea muds containing rare earth elements in the Pacific Ocean is not something to get excited about.

Early in my professional career, I headed up a team at the United Nations which helped fund, coordinate and aggregate international research on the geology and economics of subsea minerals, including managanese nodules, subsea massive sulphides (SMS), and subsea muds. A member of my team now heads up the International Seabed Authority as its Secretary-General. This was a heady, exciting time as worldwide science and engineering teams from many countries opened up a new frontier for potential mineral resources.

Unfortunately, international politics, economics, and price declines of key minerals from terrestrial sources all led to the promise of these subsea resources being postponed. The potential is a lot closer now, but we still don't have a real production operation to use as a data point. The Japanese subsea muds are scientifically interesting, but of little import beyond that for the foreseeable future.

Nautilus Minerals (TSE:NUS) has developed an SMS site in the Bismarck Sea, within the territorial waters of Papua New Guinea. The deposit is called Solwara I, and it received its final environmental clearance from the PNG government on December 29, 2009. Indicated reserves in Solwara I are 870 kilotonnes, and inferred reserves are 1,300 kilotonnes. Mineralisation of the deposit comprises a matrix of Cu-Zn-Ag-Au as target minerals.

The company had been pursuing a secondary stock offering in Canada to raise funds for the project, but the offering, even with the Canadian investor appetite for smaller mineral companies, was recently withdrawn. The company does have other alternatives, including further investment from strong strategic partners.

The work done on this project has been exemplary, and to have passed the stringent environmental regulatory framework of PNG is a testament to the corporate collaborative culture, something which U.S. extractive industries lack. Capital expenditures for the system from subsea mining to delivery of dewetted ore to the dock is estimated at about $400 million, with operating costs at $64 per tonne. The subsea collection system has been designed by an industry leading company, and a subsidiary of GE's Oil and Gas segment will operate the subsea lift pumping system.

If there is a project to watch to see the birth of a subsea mining industry, this is the one I'm watching. However, markets and economics still prevail, and the public markets apparently still don't quite have the risk appetite to fund this kind of project at attractive valuations for NUS. Stay tuned.