Nautilus Minerals In A Bind, But It's Trading Below Book Value

| About: Nautilus Minerals (NUSMF)

Nautilus Minerals (OTCPK:NUSMF) is a company I used to have very high hopes for (see my previous coverage). The short story is that they appeared to be on a path to becoming the first company to really mine the ocean floor in an economically viable fashion. As doing so involves developing competences completely alien to most mining firms - like working marine biologists and developing underwater robotics systems - Nautilus had the makings of what is often referred to as a disruptive innovator.

Disruptive innovators develop new processes and technologies that incumbents simply cannot compete with. In the mining sector, the Barrick's (NYSE:ABX) of the world specialize in yellow trucks and building mines on the continents. If a company like Nautilus developed a way of getting serious amounts of minerals from the ocean at economically viable rates, big players wouldn't know how to compete. Moreover, as is often the case with disruptive innovators, the first mover advantage is huge. It would take a second mover quite a bit of time to figure out how to replicate or outperform what Nautilus was doing. These types of disruptive companies have the most potential. In the technology sector, companies like Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL) and Dell (NASDAQ:DELL) have elements of disruptive innovation in their DNA - and we've seen the kind of results they're capable of generating for shareholders. It is from this perspective that I invested in Nautilus.

Unfortunately, the company is running into some serious problems that make the investment questionable. The big issue is that the firm is running into a conflict with the State of Papua New Guinea about whether everything is going as all parties agreed it would. Papua New Guinea is a partner on this project. If this dispute is not resolved, the project could be cancelled.

Needless to say this is quite bad news for shareholders. The company closed the month of May at a share price of $2.05. The news about Nautilus' conflict with Papua New Guinea arrived on June 1, and the stock has declined significantly since - it is trading at $1.13 per share at the time of this writing. For those who have a meaningful amount of capital in this stock, I think it may be time to bite the bullet and take a loss. Perhaps if the issue is resolved, it will be time to buy the stock. But I can foresee more price declines if there is no resolution, or at least until there is a resolution.

Personally, the amount of money I have in Nautilus is fairly insignificant, so I'm content to hold on. I view Nautilus largely as a lottery ticket. If this is successful, it is going to yield huge results even by the standards of those who expect a mania in gold exploration shares.

For those who are not in the stock yet, I think it may be worth watching. First, I should note that the stock could still fall more, so I wouldn't buy yet. Rather, I would want to see a few up days, and start to consolidate within a range. Fundamentally, though, Nautilus is now at a market cap of about $220 million, its Q1 2012 book value is listed at $255 million, and the firm has $129 million in cash and short-term assets and no debt. So it's already trading below book value and if price can fall by another 42% (which would put its share price at around $.70), its market cap will be roughly equal to its cash on hand. At that point, I think it may be worth a shot.

I still like the company in many ways; I think management is up to the challenge of being an underwater miner. That AngloGold Ashanti (NYSE:AU) also has an 11% stake in the firm suggests connections to deep pockets and established players that adds credibility and perhaps the resilience needed to bounce back from this type of setback. Ultimately, though, when you're dealing with "official" governments in our current world, it doesn't matter if you're right or wrong. If the government says you're wrong, then your opportunity is gone. That is why my opinion on the stock has changed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am long Nautilus Minerals on the Toronto Stock Exchange.