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Post Info TOPIC: Gold Rush Plunges Undersea as Miners Scour Pacific


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Gold Rush Plunges Undersea as Miners Scour Pacific
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Gold Rush Plunges Undersea as Miners Scour Pacific (Update1)

 

Oct. 3 (Bloomberg) -- David Heydon says the rock he dredged from a mile beneath the sea off Papua New Guinea looked like nothing more than a dull-brown fire hydrant. Inside were veins of copper and gold worth $300.

Two companies exploring the South Pacific seas with new remote-controlled robots are betting rocks like these will start an underwater gold rush for billions of dollars lining the ocean floor, reversing the prospects for a method of mining that has never been economical.

``We should mine on the sea floor, because it is the most common spot on the planet,'' says Heydon, chief executive officer of Vancouver-based Nautilus Minerals Inc., who recounted details of the dredging dive he supervised in February. ``It's just not the most common to us.''

With the prices of some metals, such as copper and silver, more than doubling in the past three years and land deposits dwindling, the modern day forty-niners are defying investor skepticism, untested gear and a history of failed ocean ventures to mount the first commercial exploration in a generation.

Nautilus and London-based Neptune Minerals Plc have raised more than $50 million and secured such partners as Barrick Gold Corp., the world's biggest gold producer, and Canyon Offshore Inc., a maker of undersea rigs.

They are trying to take advantage of surging demand for mineral wealth. Stockpiles of copper, needed for factories and houses in the emerging economies of China and India, have dwindled to about 150,000 metric tons as of March 2006 from 1.2 million tons in 2003, according to the U.S. Geological Survey.

Four of the five largest deposits are in Chile. Keeping up with escalating demand through 2020 will require adding 1.1 billion tons, the equivalent of about three more Chiles, to global supply, the agency says.

Metals Prices Surge

The squeeze pushed copper prices up 72 percent to $7,545 a metric ton on the London Metal Exchange this year through Sept. 29, while gold futures climbed 15 percent to $598.60 an ounce in the same time after reaching a 26-year high of $732 on May 12.

``The geological potential down there is awesome,'' says Tony O'Sullivan, who joined Nautilus as chief operating officer in May after tiring of the hunt for new strikes on land as head of base metals exploration at Melbourne-based BHP Billiton Ltd.

Ocean miners will have to overcome concern that excavation will harm the environment and prove too expensive to make the ventures profitable. Shares of Nautilus traded today at C$2.05, a 2.5 percent gain from the C$2 price at which Nautilus stock were first sold in May. Neptune declined 41 percent to 14.75 pence today from its initial share sale in October 2005.

Sentry Select Capital Corp. bought 1 million Nautilus shares, convinced that metals supply shortages are likely to persist. ``It's harder and harder to find large deposits,'' says Laura Lau, a fund manager at the Toronto-based firm, which manages C$8.5 billion.

`Substantial' Risk

That doesn't mean ocean mining is viable, says Paul van Eeden, president of Cranberry Capital Inc., a Toronto-based private investment firm. Major mines depend on churning up rock that yields a consistent grade of metals, and it's too early to say how uniform the material is on the sea floor, he says.

``The risks are substantial,'' he says. ``None of this has been tested.''

For Simon McDonald, an Australian geologist born in Tennessee who explored for minerals, oil and gas on three continents before starting London-based Neptune in 1999, history provides a road map: Start looking offshore, just as oil companies did when easily exploited deposits began drying up 35 years ago.

``At the moment, it's new and different, so people are skeptical,'' says McDonald, 44. ``But it's not going to be just a niche.''

Open-Pit Mines

In open-pit mines like Chile's Escondida, majority-owned by BHP Billiton, copper is so scarce that just 1 percent of the rock that's scooped out contains metal. Getting ore is a matter of scale: The largest mines, as much as 2.5 miles (4 kilometers) wide, can be visible from space. McDonald says there may be richer concentrations on the sea floor.

In one patch the size of a few football fields that Neptune sampled off New Zealand, the copper concentration was 8.1 percent, more than eight times the level of Chile's Escondida. The surveyed ocean area contained 11.2 grams (0.36 ounces) of gold per ton -- almost three times the 0.13 ounce-per-ton concentration that Barrick reported for its flagship Goldstrike open-pit mine in Nevada as of Dec. 31, the company says.

The undersea deposits form along the 25,000-mile ``ring of fire'' that encircles the Pacific like a gold band, stretching from Australia, through the Sea of Japan, past Canada's West Coast and on to the tip of South America.

Ocean Deposits

At the sea floor, slabs of the earth's crust collide. Sea water mingles with the magma below and vents through cracks in the floor, forming plumes of superheated, metals-rich water called ``black smokers.'' They crystallize into chimneys as tall as 100 feet (30 meters) high that may contain gold, copper and zinc.

First discovered near the Galapagos Islands off Ecuador in 1977, the black smokers are the geological cousins of deposits mined on dry land for centuries in volcanic regions of Australia and Spain, which were under water millions of years ago.

Limited sampling by research vessels has turned up 200 of these ocean deposits, mainly in coastal waters owned by New Zealand, Papua New Guinea, Japan and Indonesia, according to a report by the International Seabed Authority, which the United Nations established in 1982 to regulate sea mining.

Drill Tests

A typical deposit may contain 5 million to 10 million tons of ore rich in copper or gold -- worth as much as $7 billion at today's prices. Only 5 percent of the undersea ridges have been explored, so there are probably far more deposits, according to the report by the Kingston, Jamaica-based seabed authority.

Placer Dome Ltd., a Vancouver-based mining company later acquired by Toronto-based Barrick, invested $12 million in 2005 and 2006 to fund Nautilus's first tests. The company was founded in 1997 by Julian Malnic, an Australian writer of mining newsletters who acquired offshore exploration licenses from Papua New Guinea.

Nautilus went public on Canada's TSX Venture Exchange in May, raising C$25 million ($22.3 million). Neptune raised 9.3 million pounds ($17.6 million) on London's Alternative Investment Market in October 2005.

Barrick converted Placer Dome's investment into a 9.59 percent stake in Nautilus in August.

``Our Nautilus stake allows us to participate in the future upside,'' says Alex Davidson, executive vice president of exploration and corporate development at Barrick.

Abandoned Trials

During the sustained rally in metals markets of 1977 to 1980 some of the world's largest mining companies, including Inco Ltd. and Kennecott Minerals Co., spent $500 million combined to experiment with deep-sea mining, according to the International Seabed Authority.

Potato-sized rocks, rich in manganese and zinc, line the Pacific floor. A group led by Toronto-based Inco in 1978 brought up 800 tons from 18,000 feet of water at the equator, essentially vacuuming them into a ship through a pipe.

The trial was abandoned after prices fell and it proved cheaper to keep looking on land, says Ted Brockett, who worked on the Inco project and now runs Sound Ocean Systems Inc., a Seattle company that makes ocean-monitoring equipment.

``If the economics had been there, we'd all be out ocean mining by now,'' he says.

Robotic Miners

Today's undersea promoters say their approach is better because the deposits near black smokers are richer in metals. They can also rely on more advanced equipment developed by offshore oil companies.

Nautilus has made two sampling voyages this year, retrieving rocks with drills and robotic arms made by companies including Leidschendam, Netherlands-based Fugro NV, the world's largest surveyor of deepwater oil fields, and Canyon, a unit of Houston-based Helix Energy Solutions Group Inc. Canyon's robotic arms are attached to nine-foot-long submersibles tethered to ships and maneuvered with remote-controlled thrusters.

The deposits are located by towing another device shaped like a cruise missile. Equipped with a video camera, it sweeps the sea floor and measures temperature, salinity and magnetism.

Biologists are intrigued by the black smokers. The surrounding sea is rich in exotic life, from blind shrimp to three-foot-long tubeworms that weren't known to exist until the smokers were discovered, says Peter Rona, a marine science professor at Rutgers University in New Brunswick, New Jersey.

Shrimp, Tubeworms

He says mining should be allowed only after intensive study.

``We need sources of metals, but we need to do it in a knowledgeable and sustainable manner,'' Rona says.

The companies say they won't target active vents, only nearby mounds of metals-rich rock formed as long as 5 million years ago by now-dormant smokers. They argue that oil and gas companies already mine in the ocean and lay pipes and dig trenches in the North Sea and the Gulf of Mexico.

``The disturbance we'll do on the sea floor is less than the oil and gas industry,'' says Heydon, 50, the Nautilus chief executive.

At full production, two remote vehicles -- possibly a modified version of the wheeled rock-cutters used in coal mining -- would roll along the sea floor, grind 400 tons of ore an hour and send it to the surface through a foot-wide tube, he says. Water would be removed in a series of spirals, and the resulting ore barged to a smelter on land.

Avoiding Road Construction

Nautilus wants to produce 150,000 tons of copper per year and as much as 400,000 ounces of gold, valued at $630 million at long-term average prices, Heydon says. A 2002 study by WorleyParsons Ltd., a Sydney-based consulting firm, estimated the cost of setting up such a mine at $260 million. Heydon says it may not be that inexpensive, though it will cost less than a mine on land.

Phelps Dodge Corp. and other investors will spend more than twice as much, $600 million, to tap the world's largest undeveloped copper reserve, on rolling hills in southern Congo. The Phoenix-based copper producer says the new mine will produce 100,000 tons of copper a year after opening in 2008.

``It's becoming difficult to find terrestrial deposits that are of high quality,'' says David Coffin, a mining analyst who produces the Hard Rock Analyst newsletter in Vancouver. Coffin, who watched aboard the Nautilus ship in February as a robot recovered rocks, says he bought the company's shares. ``This is an idea whose time has come.''

To contact the reporter on this story: Peter Robison in Seattle at robison@bloomberg.net

To contact the editor responsible for this story: Paul Horvitz in Boston at phorvitz@bloomberg.net



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