Nautilus Minerals Releases Offshore Production System Definition and Cost Study

Nautilus Minerals Inc. has provided the results of an independent definition and cost study for its proposed offshore production system to be deployed in the territorial waters of Papua New Guinea (PNG).

The study provides definition and cost estimates to extract material from the seafloor mineral resources at the company’s Solwara 1 site, to raise it to the support vessel, dewater it and deliver it to the port of Rabaul, PNG.

The key conclusions of the study are as follows:

Capital costs for the offshore production system, including those

associated with barging to the port of Rabaul, are estimated to be

$383-million (U.S.) (including a 17.5-per-cent contingency).

Average operating costs up to the port of Rabaul are estimated to be

$70 (U.S.) per tonne (including a 10-per-cent contingency) based on a 1.35-million-tonne-per-year production rate.

The study indicates production commencing at a rate of 1.2 million

tonnes per year (dry equivalent) but notes that the offshore production

system will have the capacity to ramp up to 1.8 million tonnes per year.

The study estimates it will take 30 months to complete the build of the

offshore production system and to commence commercial production once

approved by the board of Nautilus.

• Capital costs for the offshore production system, including those

associated with barging to the port of Rabaul, are estimated to be

$383-million (U.S.) (including a 17.5-per-cent contingency).

• Average operating costs up to the port of Rabaul are estimated to be

$70 (U.S.) per tonne (including a 10-per-cent contingency) based on a 1.35-million-tonne-per-year production rate.

• The study indicates production commencing at a rate of 1.2 million

tonnes per year (dry equivalent) but notes that the offshore production

system will have the capacity to ramp up to 1.8 million tonnes per year.

• The study estimates it will take 30 months to complete the build of the

offshore production system and to commence commercial production once

approved by the board of Nautilus.

As of the date hereof, the complete build of the offshore production system has not been approved by the board of Nautilus. Subject to securing adequate financing to advance the project through to commercial production, board approval is expected to be received during 2010. Nautilus does not intend to complete a formal feasibility study or define a large, long-life resource or reserve before it proceeds with the completion of the equipment build and commencement of production at the Solwara 1 project. Management considers the company’s best interests are served by first demonstrating that existing offshore technologies can be adapted to cut and recover high-grade seafloor massive sulphides from the deep ocean.

Stephen Rogers, Nautilus’s chief executive officer, commented: “The study was completed to provide cost guidance and project definition. The work contains the results of over five years of engineering, testing and mine planning. Our estimated operating costs are competitive with the operating costs for existing deep underground mines. However, one of our great advantages over land-based mining is that the equipment used in our offshore production system is mobile, allowing production at successive sites without needing significant additional capital investment.”

The study

The study was undertaken to obtain an independently confirmed summary of the components and an associated estimate of the offshore production costs only. Detailed information concerning the cost estimates and the basis for the estimates can be found in the study.

The estimated operating costs set out in the study do not include the cost of stockpiling material in Rabaul, reclaim from the stockpile, shipment to a treatment facility or any other downstream processing, transportation and sales costs including, but not limited to concentration, treatment and refining charges, cost of sales and any statutory royalties or production taxes. These costs are significant. The estimated operating costs also exclude the capital and financing costs associated with establishing the offshore production system.

In preparing the operating cost estimate, a heavy fuel oil price of $523 (U.S.) per tonne and a production support vessel charter rate of $75,000 (U.S.) per day (being a portion of the estimated daily costs of $144,796 (U.S.) for the production support vessel) were assumed based on recent competitive market quotes. These two key assumptions account for approximately 40 per cent of the estimated operating costs. Fuel costs will be subject to fluctuations in the market price of oil. The study assumes that the production support vessel for the project will be chartered. As Nautilus has not yet entered into a charter for the vessel, the price used in the estimate may not be realized.

Investors are cautioned that the study is not an economic assessment of the Solwara 1 project as a whole and does not confirm the project’s economic viability. Investors are cautioned not to use the study for that purpose and that a study of all costs, rates of recovery and reasonable revenue projections is necessary before any assessment of economic viability can be made.

The study was developed from a preliminary mine plan that includes inferred mineral resources. Investors are cautioned that inferred resources are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves, and there is no certainty that the costs relating to the offshore production system set forth in the study will be realized. In addition, the indicated mineral resources included in the mine plan are not mineral reserves and do not have demonstrated economic viability.

The study addresses the entire proposed offshore production system,

including barging to a land-based stockpile at Rabaul in Papua New Guinea.

The principal operations involve:

Seafloor cutting and gathering;

Mineralized material (slurry) recovery to surface;

Slurry dewatering;

Mineralized material discharge to transportation barges;

Transport of the mineralized material to the port of Rabaul.

• Seafloor cutting and gathering;
• Mineralized material (slurry) recovery to surface;
• Slurry dewatering;
• Mineralized material discharge to transportation barges;
• Transport of the mineralized material to the port of Rabaul.

The proposed offshore production system comprises various technologies used in the oil and gas, mining and dredging industries but modified for the offshore production system.

Seafloor cutting is proposed to be undertaken by two large robotic machines that would excavate material from the seafloor by a continuous cutting process, not unlike coal or other bulk continuous mining machines on land. The auxiliary miner is a preparatory machine that deals with rough terrain and creates benches for the other machines to work. It will operate on tracks with spud assistance and has a boom-mounted cutting head for flexibility. The second machine, the bulk miner, has higher cutting capacity but will be limited to working benches created by the auxiliary miner. Both machines would leave cut material on the seafloor for collection by the gathering machine. The gathering machine, also a large robotic vehicle, will collect the cut material by drawing it in as a seawater slurry through internal pumps. The slurry will exit the gathering machine through a flexible pipe and would then be transferred to the riser and lift system (RALS).

The proposed RALS system comprises a large pump and rigid riser pipe hanging from a vessel which delivers the slurry to the surface. The proposed pump is a positive displacement type, designed and built by GE Hydril (Houston, Tex.). The pump would hang from a solid vertical riser pipe suspended beneath the support vessel. The pipe would be deployed to the seabed by a large derrick and draw works system on board the vessel.

On deck of the production support vessel (PSV), the slurry would pass through a dewatering plant. The dewatered material would be discharged to a transportation barge moored alongside. Used seawater would be pumped back to the seafloor through the riser pipes and would provide the hydraulic power to operate the RALS pump. Discharge of the return water at the seafloor would avoid impacts to the warm surface seawaters, minimizing environmental impact of the operation.

The transportation barges will haul the material a short voyage of approximately 50 kilometres from the Solwara 1 site to a stockpile location in the port of Rabaul. Definition and costs for barge unloading and all subsequent activities are not included in the scope of the study.

The study, which is titled “Offshore production system definition and cost study” and dated June 21, 2010, was prepared by Phil Jankowski, Erich Heymann and John Blackburn of SRK (Australia) Pty. Ltd. in Perth and includes information prepared by Peter Chwastiak of Clough Ltd., Peter Munro of Mineralurgy Pty. Ltd., Andrew See of Ausenco Services Pty. Ltd. and Ian Lipton of Golder Associates Pty. Ltd.

The qualified persons have reviewed and approved the technical disclosure contained within this news release and are qualified persons and independent of the company in accordance with National Instrument 43-101 — standards of disclosure for mineral projects as of the date hereof and at the time of the preparation of the study.

The full text of the study can be downloaded from Nautilus’s website.

Issue of variation order

The offshore production system described in the study requires the build of three subsea deepwater machines for cutting and gathering, being the auxiliary miner, bulk miner and gathering machine.

Nautilus has today finalized and issued a variation order to Soil Machine Dynamics Ltd. (SMD) to modify the existing design-build contract for the provision of two integrated machines and one handling system to three specialist machines and the associated launch and recovery systems. The SMD design-build contract was disclosed in Stockwatch on Dec. 18, 2007.

The variation order valued at approximately 19 million pounds sterling ($28-million (U.S.) or $29-million (Canadian) equivalent)(1) has been incorporated in the study. It should be noted that no approval has been granted by the Nautilus board for the recommencement of build of any other equipment for the offshore production system.

(1) Exchange rates used: $1.00 (Canadian) equal to 97 U.S. cents and 0.66 pound sterling.