For me, the biggest dream I'm chasing in single stock investing, meaning the kind of stocks I'm always on the hunt to find are those that fit into the paradigm of disruptive theory. These are the companies that are developing new technologies, new business models, and new customer groups. Though I'm not a fan of Apple (AAPL), there is no denying it is a master of disruption; over the past 10 years the company has managed to disrupt the software industry (via the app store distribution model), the music industry (via iTunes and iPods), and possibly the PC industry (if the iPad can continue improving and become a better input device). It might also disrupt television and books as well. Getting in on disruptive innovations early is the name of the game, and is what will give stocks huge returns -- as Apple clearly illustrates (though as I've noted in my recent commentary, I think the stock is appreciating too fast and that a bubble is forming).
In the gold sector, there are a few disruptive opportunities I'm looking for:
- A firm that focuses on panning, and coordinating panning operations. Using the Internet to build and coordinate panning projects into a larger production opportunity meets the hallmarks of disruption, in that it utilizes new processes and has the potential to sell to new customers. I don't know of any, but it's something I'm hunting for.
- Going to places that haven't been explored before -- such as the polar ice caps, outer space, and the ocean floor. To benefit from these new frontiers, new technologies will be needed.
And so when Nautilus Minerals (NUSMF.PK), a firm planning to mine deep in the sea, crossed my radar, I immediately jumped: this has the feel of a disruptive opportunity.
Nautilus will begin production on its Solwara Project, an effort to mine the ocean floor off Papua New Guinea, for gold and copper (along with some zinc and silver), next year (see the fact sheet [pdf] for a more detailed look). The company has got all the necessary permits. It has some pretty impressive robotics technology, as well as a management team with the unique skill set needed to mine the ocean floor. Here is a video presentation from management. Company leaders clearly understand they are at the forefront of something new, and thus they need to be careful and humble and aware that much learning will be required to successfully pull this off.
Nautilus is well-financed, with over $112 million in current assets and no long-term debt. I don't doubt that this is going to be a very expensive operation, and one that may require a few failures before the company gets it right. Nautilus currently has a market cap of $458 million, and a book value of $246 million. For opportunities like Nautilus, which I regard as especially high risk/high reward, I prefer to see a price/book ratio under 2 at the current time in the mining sector. So long as the market cap remains under $500 million, I think the stock is sufficiently priced for buyers. With that said, it should be noted that Nautilus has jumped pretty sharply of late; over the past week, it's up over 16%.
There's still a lot of risk with this company -- who knows what the final cost per ounce is going to be and how long it's going to take, assuming it can get production going at all. But the first mover advantage here is enormous; if Nautilus gets going and inspires others, it will likely take new entrants a while to get the technology going and operations running smoothly, while Nautilus will be in a position to expand to elsewhere in the massive oceans. Gold discoveries through conventional mining operations are declining, and the price of gold is rising -- so exploring the "out there" ideas like mining the ocean floor, the arctic regions, or the moon are becoming more feasible.
Personally I like this company and have added it to my watch list. I do want to see a price pullback from its recent rise before entering; I wish I had gotten in earlier, of course, although I'm not interested in chasing and so will acquire after a pullback at some point. I view this stock as an investment with great long-term potential if it's disruptive opportunity can be fully realized. Such opportunities are exceedingly rare, and I think they must be acted upon when they present themselves; as far as I'm concerned, it's the best and most lucrative part of single stock investing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I may initiate a long position in Nautilus on its TSX listing shortly.