TMC the metals Co Inc. (TMC) Q4 2021 Earnings Call Transcript

Good afternoon, everyone, and thank you for participating in the Metals Company Fourth Quarter and Full Year 2021 Corporate Update Conference Call. Joining us today are the Metals Company's Chairman and Chief Executive Officer, Gerry Baron, the Metals Company's Chief Financial Officer, Craig Shesky, and Epsilon Carbon's Managing Director, Vikram Handa. Following their remarks, we'll open the call for your questions. Before we go further, I would like to turn the call over to CFO, Craig Shesky, as he reached the company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements and information about the use of non-GAAP measures. Craig, please go ahead.

Thank you. Please note that during this call, certain statements made by the company will be forward-looking and based on management's beliefs and assumptions from information available at this time. These statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those set forth in the Safe Harbor provisions are forward-looking statements that can be found at the end of our fourth quarter 2021 corporate update press release. Such statements may also be found in our Form 10-Q when it's available, and other reports filed with the SEC, all of which provide further detail about the risks related to our business. Additionally, please note that the company's actual results may differ materially from those anticipated, and except as required by law, we undertake no obligation to update any forward-looking statement. Our remarks today may also include non-GAAP financial measures, including with respect to free cash flows. Additional details regarding these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures, can be found in our slide deck being used with this call. This slide deck is available on our website, investors.medals.co. I'll now turn it over to Gerry Baron, the Metals Company Chairman and Chief Executive Officer. Gerry, please go ahead.

Thank you, Craig, and good afternoon. I appreciate everyone joining us today for our fourth quarter corporate update. You're welcome to follow along with our slide deck, which can also be accessed at investors.medals.co. Today, we will provide an update on strategic relationships, discuss recent market developments, highlight our financial and project developments, and preview upcoming milestones for the company. We'll begin with a brief overview of the TMC value proposition. We believe TMC's estimated resource of polymetallic nodules can significantly impact battery metal supply. It's abundant, representing the largest estimated potential source of battery metals globally. We believe our portfolio alone contains enough estimated in situ quantities of nickel, copper, cobalt, and manganese to electrify 280 million electric vehicles, equivalent to the entire US passenger fleet. The resource is secure as the nodules are located in international waters, regulated by the International Seabed Authority, which includes 167 member states and the European Union. The ISA resumed in-person meetings in December after a nearly two-year pause due to COVID and is currently meeting in Kingston, Jamaica, aiming to finalize the exploitation regime by July 9, 2023. We anticipate our production costs to be low due to the high grades of these four metals. While on land, obtaining these metals might require three different mines with diminishing grades, nodules provide high grades of all four metals in a single resource, likely placing us in the bottom quartile of the C1 nickel cost curve. At full production, we expect to be the second lowest cost producer of nickel worldwide and the lowest outside of Russia. Importantly, we also aim to significantly reduce ESG impacts compared to land-based miners, expecting a 70% to 99% decrease in life cycle ESG impacts, with no child labor or social displacement, no deforestation, and no harmful hexavalent chromium, which has been reported in communities near nickel mines in Indonesia. Our production is projected to generate almost no solid waste and zero tailings while potentially cutting CO2 equivalent emissions by up to 90%, all utilizing conventional technology. We are striving for even better outcomes. Additionally, the recent surge in metal prices has resulted in a substantial increase in the expected NPV for NORI-D, our first project. With current metal prices, including nickel at $30,000 per tonne, the estimated NPV for NORI-D would be $22 billion, assuming all other factors remain constant. We believe TMC is at the convergence of three major trends in the clean energy transition. At COP26 in Glasgow last year, the world committed to speeding up electrification, aiming for 100% zero emissions car sales by 2025 in major markets and globally by 2040. However, these ambitions seem disconnected from the geological and geopolitical challenges in raw material supply chains. The availability and pricing of metal supply pose ongoing risks for the clean energy transition, making the assurance of critical metal supply chains a priority for many governments. It took several years for the global community to recognize China's effectiveness in dominating the battery materials supply chain and the difficulty of achieving mineral independence without adequate domestic resources. The ESG focus presents a dilemma: while we want to accelerate the clean energy transition, we also aim to eliminate the destruction of nature tied to mining critical minerals. There are no completely zero-impact critical metals, but we believe TMC can provide significantly lower impact metals without damaging anyone's environment. In light of the ongoing humanitarian crisis in Ukraine, discussing supply chains amidst such suffering feels challenging. Supply chain disruptions have tangible consequences; Russia controls about 20% of the Class 1 nickel market, and Chinese producers govern most of the nickel growth. Concerns about Russian supply and reduced Chinese production have created turmoil in the London Metals Exchange, driving nickel prices to historic highs. Such volatility is detrimental to the clean energy transition. At TMC, we are working to establish ourselves as the largest, lowest-cost, and lowest ESG impact source of Class 1 nickel supply outside of Russia. Nickel represents about 50% of our projected future revenues at current metal prices. Our estimated resource is substantially larger than any other undeveloped nickel project. Earlier this year, mining.com ranked our NORI-D asset as the largest undeveloped nickel project globally. Our strategy has consistently involved developing the polymetallic nodule resource through partnerships, which we believe will allow us to expedite progress and incur lower capital costs. Two strategic developments announced last week mark significant progress in that direction. Project Zero is our first small-scale commercial project, aiming to collect and process approximately 1.3 million wet tonnes of nodules from the NORI-D area. As a result of our collaborations with Allseas and Epsilon Carbon, we expect to lower TMC's share of preproduction costs from $193 million to roughly $55 million. Onshore, we've signed a non-binding term sheet with Allseas outlining the potential framework and commercial terms for upgrading the pilot collection system to a Project Zero system for operations in the NORI-D area. The pilot collection system includes a surface production vessel called the Hidden Gem, the vehicle used to gather nodules from the seafloor, and the systems needed to deploy the collector and transport nodules to the vessel. Allseas is currently testing the system, with a full pilot trial expected in the NORI-D area during Q3 this year. Following these trials, Allseas plans to enhance this pilot setup into our small-scale production system. The estimated total cost to commence production is currently less than $110 million, and Allseas has agreed to finance these expenses, with TMC's subsidiary, NORI, reimbursing Allseas 50% of these costs from March 31, 2023, until production starts, anticipated in Q4 2024, contingent on NORI obtaining an ISA exploitation contract. Upon entering production and provided Allseas meets specific production targets, NORI expects to compensate Allseas with a nodule collection and transshipment fee that will cover Allseas' operational costs, its share of preproduction expenses, and a fee linked to the value of contained metals, which is currently estimated at around $165 per wet tonne of nodules during the first production year, decreasing by over 20% in subsequent years as production scales to 1.3 million tonnes of wet nodules. Assuming a moisture content of 24%, this translates to around $217 in costs per dry tonne. On the revenue side, our internal estimates suggest Project Zero could generate approximately $700 per dry tonne based on our nickel-copper matte and manganese silicate products. We plan to elaborate and adjust these cost estimates in the definitive agreement intended to be finalized by December 31 of this year. We also expect the cost per tonne to decline further if Allseas enhances the production capacity of its surface production vessel through the addition of multiple collectors on the seafloor. You can see additional images of the pilot collector being lowered into the water and operating on the seafloor of the North Atlantic earlier this month. We are also thrilled to announce that Allseas and NORI plan to explore acquiring a second production vessel similar to the Hidden Gem, a Samsung 10000 designed for a higher production rate of 3 million tonnes of wet nodules. This enhanced production system is anticipated to significantly lower the per tonne nodule collection cost compared to the first production system. Onshore, we have signed a non-binding memorandum of understanding with Epsilon Carbon to conduct a pre-feasibility study for a renewables-powered Project Zero plant in India that could process 1.3 million tonnes of wet nodules annually, collected using Allseas Project Zero system operating on NORI-D. I have invited Vikram Handa, Managing Director of Epsilon Carbon, to provide more information about the company.

Thank you very much, Gerry. And it's exciting to be here. Epsilon Carbon started in 2010 with an idea that we could turn coal tar, a waste stream from steel making, into high-quality carbon products. Since then, we have built a good business around the long-term exclusive raw material supply contract with JSW Steel, which happens to be India's largest steel manufacturer. We've been producing a wide range of carbon-based products for some of India's biggest needs in aluminum, carbon black, tires, and other specialty products. We have done so with a low-carbon footprint because we use waste gases to produce mesocoke and more than 80% renewable power for thermal purification. About five years ago, we decided to expand into the battery business and started Epsilon Advanced Materials to focus on that. The Anode Precursor Materials were a logical place for us to start, but we had ambitions to expand into Cathode materials as well. On the Anode material side, we have now had the first plant in India producing Synthetic Graphite, and we are building a plant in Finland to make Natural Graphite as well. In Cathode materials, we are working on making a precursor for the LFP battery chemistry made from the steel plant waste stream. Now with the memorandum of understanding we have signed with TMC, we are thrilled at the prospect of processing nodules and producing nickel metal as well that could cater to NMC and other nickel-rich battery cathode chemistries. We have built our entire carbon products business on an unconventional raw material, a waste stream from the steel plant, and then invested our R&D resources to produce Synthetic Graphite. As a company, we thrive on these types of challenges, doing things that have not been done before. The polymetallic nodule resource presents a game-changing opportunity to tap another unconventional resource with several intrinsic properties that could potentially allow us to develop a Cathode precursor material business with a much lower environmental and social impact. We have already started on the pre-feasibility report, subject to us reaching binding head of terms in the next couple of months with TMC. We look forward to engineering, permitting, financing, building, and operating our Project Zero Plant in India. It is a relatively small-scale plant, but we believe that the scale of TMC's resource portfolio has the potential to turn India into a significant supplier of critical minerals for the battery and steel industry as well. So we're looking forward to working together and building this project in the near future.

Thank you, Vikram. I'd add here that for the last three years, we have engaged with many potential onshore partners and visited many plants around the world. Metallurgical processing tends to be a rather slow-moving, capital-intensive business, usually run by large, established companies, not necessarily known for their innovation and entrepreneurial spirit. Having recently spent some time in India with Vikram and his team, visiting their plants and potential sites for a Project Zero plant, I can say we were very impressed. The operating philosophy of putting every bit of resource to work and nothing to waste, attention to detail, focus on people, and the environment, it felt like we found a kindred spirit. At a strategic level, I could not imagine the benefit. In Epsilon Carbon, we found a partner who is already in the battery materials space and backward integrated with the steel industry, the two target industries for our products.

Thank you, Gerry. We have certainly enjoyed working with your technical team over the last few months as well. The work done by the TMC team, including a zero solid waste flow sheet and the pilot plant program results have given us a good head start as we aim to deliver a project feasibility report for Project Zero in India by year-end. I think it's important to understand that after China, India is the world's largest steel manufacturer and is planning to triple this production to 300 million tonnes by 2030. This expansion will also require a lot of manganese ore, most of which India has to import today. The Project Zero plant is expected to produce a sizable volume of manganese silicate product that could be used in the production of silicon-manganese alloys instead of manganese ore and appears to have several advantages, including reducing CO2 emissions, lowering downstream power consumption, and eliminating the need for blending. Over the last month, my team has been meeting with some of India's largest manganese alloy producers and have secured initial expressions of interest in the manganese product. TMC has shipped us the manganese samples, and we look forward to the next stage of testing with these customers and taking their interest ahead.

And India is, of course, home to 20% of the world's population and has a strong development-led demand for raw materials. According to UN-class, polymetallic nodules in international waters are a common heritage resource. Personally, I believe that putting this resource to work in a country with the world's second-largest population that needs a lot of steel for its continued development is putting such a resource to good use. I'd like to thank Vikram for taking the time to join us today, and he has kindly agreed to stay behind to bring questions at the end of this session. So in closing here, offshore, our partner Allseas has enabled us to move at a near impossible speed and capital efficiency. Onshore, we hope that our relationship with Vikram's team will allow us to do the same. In terms of governance, we announced the appointment of Kathleen McAllister to our Board in February. Kathleen is a seasoned CEO, CFO, and Board Director who has held diverse leadership roles in global, capital-intensive companies in the energy value chain, including Black Hills Corporation, LNG partners, and Transocean Partners. Kathleen is expected to step into the role of Audit Committee Chair in April. Kathleen's appointment brings our gender parity to 50/50 on TMC's Board. Just 3% of S&P 500 companies' Boards are comprised of 50% or more women today. So TMC is joining a small but growing number of companies delivering on gender parity goals.

Under the nickel market, we've been talking about impending supply issues for nickel for a while, but the events of the last several weeks have elevated the urgency of this topic. Since the beginning of Q4 2021, nickel prices have more than doubled, but not in a linear fashion. Nickel prices started Q4 '21 at around $18,000 a tonne, steadily rising to a spike as high as $100,000 a tonne before the LME stepped in and stopped nickel trading for more than a week. Nickel prices declined significantly as trading reopened and eventually dropped below $30,000 per tonne, but then jumped in the last couple of days to over $37,000 per tonne before the LME halted trading yet again. Higher nickel prices are a major tailwind for our project economics, which Craig will discuss later. The nickel price rally is still playing catch-up to recent rallies in cobalt and lithium. If you were to run the same chart since the beginning of 2021, you would see that cobalt prices are up 350% and lithium carbonate prices are up 600% in that time. In February, Benchmark Mineral Intelligence reported that high lithium prices pushed up the cost of LFP cells above those of high nickel cells on a $1 per kilowatt-hour basis for the first time in a decade. This analysis has been a moving target due to the nickel roller coaster this month, but it underscores the fact that there is no safe haven for automakers when it comes to battery materials. They need to lock up abundant, secure, and low-impact suppliers of nickel, cobalt, copper, and manganese. Manganese may rapidly gain in importance. Elon Musk stated this week in Berlin that there's interesting potential for manganese for Tesla battery cathodes, and TMC expects to be a top four global producer of manganese through NED alone, and that's just 22% of our total estimated resources.

The metal intensity of the clean energy transition is now reasonably well understood. There simply is no energy transition without exponential growth in metal supply, and the supply of some base metals needs to grow six times by 2040 to reach a goal of net zero by 2050, according to the International Energy Agency. It is estimated that roughly 30 million electric vehicles per year globally could be left unbuilt due to battery material shortages, and roughly half of what might otherwise be sold without constraints in metals. Some research analysts are now publicly doubting the medium-term EV sales forecast from automakers due to the recent nickel pickle. So, where will battery metals for gigafactories come from? Let's take the US as an example of this global conundrum. The US currently has zero or de minimis production of nickel, manganese, and cobalt, the NMC and the NC and an MMC battery cathode. It takes on average about 16 years to go from discovery to production for a new mine, but many will never get permitted. Permits have already been denied for several proposed copper and nickel mines in the US. Rather than looking for new deposits in people's backyards, we're seeing growing support to look far offshore instead. We hold exploration contracts in the Clarion-Clipperton zone, the colored areas on this page. In early 2021, AMC Consultants issued SEC-compliant technical resource statements on the Nori and TOML areas, confirming a total estimated resource of 1.6 billion wet tonnes of nodules with an in situ resource of nickel, copper, cobalt, and manganese, equivalent to the requirements of 280 million electric vehicle batteries. Importantly, the CCZ area under protection has increased to 43% after the ISA set aside three additional blocks in December to ensure all habitat types that could be impacted by nodule collection are represented. The global ambition to protect 30% of the oceans by 2030 means that CCZ is already ahead of the curve here. Leaving large areas untouched is a strong measure to protect biodiversity. The sea floor in the CCZ is an abyssal desert that represents the most common area on the planet. Microbes account for over 70% of life, as measured by biomass, and there is 1,500 times less life per square meter in the abyssal desert than in the biodiverse carbon-storing rainforests of Indonesia. Most of the nickel growth is expected to come from these rainforests, with Volkswagen in China just announcing they plan to get 120,000 tons of nickel from Indonesia by partnering with China's Tsingshan. I'm curious what WWF Germany, Greenpeace, or VW customers had to say about this announcement. If you look at the lower right yellow box on this map, that is NORI-D, our first project. NORI-D is estimated to contain 356 million tons of wet nodules, representing 22% of TMC's total resources.

Hello, everybody. We’re having technical difficulties. Please stay on the line.

Ladies and gentlemen, please remain holding. Again, ladies and gentlemen, please remain holding.

I think we're back up, Gerry, if you want to begin again. Apologies for the inconvenience there, everybody, but ready to start again.

Okay. Apologies everyone. Starting on slide 18. So the support for nodules has been growing among the world's largest economies for some of the most credible voices. India has an exploration contract and Prime Minister Modi is investing $530 million over the next five years in the country's Deep Ocean Mission, including funding for an integrated nodule mining system. France also has an exploration contract and President Macron is investing €300 million in deep-sea nodule exploration as a pathway to mineral independence and reindustrialization of his country. Russia controls two exploration contracts, and China controls three exploration contracts, the same number as TMC. These exploration contracts are strategic holdings with major national security implications. On the top of this page, you can read some of the positive statements made by some respected agencies on the topic of deep-sea minerals. Those opposing deep-sea mining claim that the scientific inquiry on this topic is brand new and knowledge is insufficient. When it comes to CCZ nodules, we respectfully and strongly disagree. The environmental impacts of nodule collection have been studied for the last 50 years, including a study by NOAA from 1975 to 1980. The findings of NOAA's Deep Ocean Mining Environmental Studies, or DOMES, was reported to the US Congress in 1995, stating that the DOMES project has basically eliminated virtually all other environmental concerns raised about deep-sea mining, except the collective sediment plume issue that required further study. Much progress has been made on plumes since then. Since 2018, we and our partners have undertaken the most intensive deep-sea exploration and environmental baseline data collection effort in history, completing 14 campaigns totaling 450 days at sea while collecting nearly 1,000 terabytes of data. Senator Lisa Murkowski, a centrist voice in the US Senate with a long track record on critical mineral issues, wrote a letter in February urging the Department of Energy to consider new abundant sources of supply like polymetallic nodules, which can offer a pathway to mineral security for the US. In February, 17 retired generals, admirals, and officers across four branches of the military wrote to the Pentagon asking that they consider responsible development of polymetallic nodules as a potential game changer for US critical mineral supply lines. We are also seeing a more nuanced treatment of the nodule solution in the media. Jim Conca from Forbes called nodules much less impactful than any land operation and the most optimal method for getting these critical metals between now and 2050. Steven Brown, an expert on Indonesian nickel operations, called out nodules as the only genuine alternative to rainforests. The awareness of the environmental impacts of Indonesian nickel is growing. A Guardian investigation into nickel mining in Indonesia discovered evidence of poisonous hexavalent chromium contamination in the drinking water near one of Indonesia's largest nickel mines, the same cancer-causing chemical made famous by the Aaron Brockovich story in film. The metals for the clean energy transition need to come from somewhere. We believe that an unbiased science-based assessment of life cycle ESG impacts would favor nodules over the alternatives. Life cycle studies published in peer-reviewed journals demonstrate that getting nickel from polymetallic nodules significantly reduces the environmental impacts compared to getting the same amount of metal from land-based mining. Carbon emissions are reduced by more than 90% compared to nickel pig iron, water usage has reduced significantly, and solid processing waste is reduced to nearly zero with no tailings produced. Finally, as there is no plant life on the sea floor of the CCZ and no mechanism to release carbon into the atmosphere from nodule collection, nodules represent a 90% reduction or more in terms of carbon emissions at risk compared to both nickel sulfide and nickel laterites.

But sometimes seeing the operations is more impactful than seeing the impact numbers. This clip is from a collective test performed in the CCZ by another ISA contractor, GSR, a subsidiary of a Belgian marine engineering group, DEME. Conceptually, we have taken a similar approach to collection. We take advantage of the Coandă effect, the propensity of a fluid to follow and stay attached to a convex surface. This allows us to direct a water jet in parallel with the seafloor to gently dislodge nodules and then channel the stream with nodules inside the collector along the convex shape. Even I was struck by the footage from GSR's collected tests and wanted to share it with you so you can see the extent of the impact on the seafloor with your own eyes. Allseas is in the middle of the test program of our pilot collector now, and hopefully, I'll be able to share with you similar footage by the end of the year. Here's what the test area looked like afterward. You can see the tracks on the seafloor, but I invite you to mentally compare these tracks on the seafloor to images of cut down rainforests, mining waste, and displacing local villages and other impacts. On the plumes, essentially the seafloor mud disturbed by the collector, it's been a major concern raised by activists who speculated it could travel for hundreds of thousands of miles and stay suspended. Last year, we had several plume studies come out from universities like MIT and field test by other contractors like GSR and BGR and our own studies. So far, the takeaway is that the seafloor plume generally only rises five to six meters above the seafloor, and most of it resettles within hours to days and mostly in the test area. The cornerstone of the environmental and social impact assessment is collecting baseline data on the environment. We need to understand the pre-impact state so we can compare it to what happens after nodule collection. While we started doing environmental data collection campaigns several years ago, this has been a record year for us, with five safe and successful campaigns and 170 days spent at sea throughout the year. As I noted earlier, since 2018, we have successfully completed 14 campaigns totaling 450 days at sea while collecting nearly 1,000 terabytes of data. Onshore, we have developed a low-risk flowsheet with the help of Hatch. We now demonstrated that we can turn these nodules into valuable metal products. First, our pilot plant program turned nodules into a manganese silicate product that can go directly into manganese alloy production and a nickel, copper, cobalt alloy and intermediate product that can be used as feedstock in some of the existing smelting and refining operations. Here is what the alloy looks like. I just realized that I hadn't turned my camera back on. We are continuing our bench-scale work to refine the nickel, copper, cobalt matte into nickel sulfate, cobalt sulfate, and copper cathode. We're finding that potential customers are quite interested in the matte material. The payables on the matte material could be 85% to 90% of LME prices for those metals, and selling the matte material would mean we could skip the refining step entirely, saving $2 billion from the Project One CapEx bill. We are regulated by the International Seabed Authority. As we speak, the ISA session is in progress in Kingston, Jamaica, with the focus on financial regime, regulations, and standards and guidelines. Last July, the Republic of Nauru notified the ISA of Nauru’s intention to lodge an application for an exploitation contract in July 2023. This two-year notice applies to the ISA to consider and provisionally approve Nauru's application based on the state of the exploitation regulations at the time, whether final or draft. Following this two-year notice, the ISA laid out a roadmap for its work plan in 2022 and 2023, two sessions per year, and a third meeting of the council in 2022 will also be considered. We expect that the ISA will meet their stated goal of finalizing the exploitation regulations by July 9, 2023. NORI will be applying for an exploitation contract in the third quarter of 2023 based on final regulations. This timeline keeps us on track to begin commercial production in the NORI-D area in Q4 2024. We will need to raise additional funds in the next 12 months or so, but we're not in a rush to do it. We continue to hit our milestones, which we believe will allow us to raise capital on more attractive terms. Our cash balance was $85 million at the end of December, and the amount currently sitting in our bank account as of March 24 was $73 million. Our Board has approved a budget that allows us to achieve many key milestones and to fund operations into Q3 2023. Here are some of the milestones we expect to reach this year. We intend to reach binding Project Zero agreements with both Allseas and Epsilon Carbon, de-risking Project Zero and reducing the cost to be borne by TMC prior to getting into commercial production. We intend to secure offtakes for Project Zero's nickel, copper, and cobalt matte and the manganese silicate products. Onshore, we'll analyze and share the results of our pyrometallurgical pilot program and we'll also complete our bench-scale hydrometallurgical work with SGS. Offshore, we'll be doing a pilot collector trial this summer in the NORI area D. This trial will include a second vessel as part of our collector test monitoring campaign, which will observe and analyze the impacts of pilot collection. We're also excited to continue developing the digital twin with Kongsberg, which will give eyes and ears to the regulators and our stakeholders. With that, I'm turning it over to Craig to speak on TMC's project economics and our fourth-quarter results. Thank you, Gerry. In March 2021, AMC Consultants issued an SEC Regulation SK 1300 compliant initial assessment of the project economics for the NORI-D area. This initial assessment is available in the Investors section of our website and the NORI area D financial model can be found beginning on page 3(10) of that document. The NORI-D area represents just 22% of our total estimated resource portfolio. The initial assessment arrived at a net present value of $6.8 billion for NORI-D at the beginning of last year, assuming $7 billion of project developer CapEx. As we know, prices for most of our metals have reached multi-year highs, and at current metal prices, except for nickel, which we run at $30,000 per ton, the net present value would triple to almost $22 billion with potential lifetime EBITDA of over $125 billion just for NORI-D. As potential steady-state production of 12.5 million tonnes per annum on NORI-D toward the end of this decade, we expect to be the lowest cost nickel producer in the world outside of Russia with estimated steady-state EBITDA margins above 75% at current metal prices according to our internal estimates. We believe these attractive project economics can support us in trading future margin for reduced CapEx upfront on Project One. Our recently announced arrangements with Epsilon Carbon and Allseas show our commitment to our CapEx-light strategy with the initial smaller scale production for Project Zero. Just one last note on nickel; certainly, the events of the past month have shown the world just how sensitive these metal supply chains can be to geopolitical events. The outlook for Class 1 nickel is bright, but predicting the future of metal prices is not our business. As such, we've included a sensitivity table to show the NPV for NORI-D at various nickel prices, holding all other assumptions constant. The rule of thumb is that every $10,000 per ton delta in the nickel price would change today's NPV on NORI-D by around $6 billion. As Gerry mentioned earlier, our cash balance of $85 million as of the end of December remains sufficient to fund operations into the third quarter of 2023, at which point TMC's subsidiary, NORI, is expected to apply to the ISA for an exploitation contract. Despite facing significant financial headwinds as part of the de-SPAC process, we achieved major project development milestones in 2021, which you can see on the right-hand side of this page. The company recorded a net loss of $19.8 million or $0.09 per share for the fourth quarter of 2021 compared to a net loss of $17.1 million or $0.09 per share for the fourth quarter of 2020. The higher net loss was mainly attributable to $2.6 million in non-cash share-based compensation and increased general and administrative expenses due to being a public company, partially offset by an $8.5 million reduction in the fair value of the warrants liability as a result of the decrease in our share price. Backing out that $8.5 million warrant liability adjustment results in a net operating loss of $28.3 million for Q4 2021. The exploration expenses of $12.8 million in the fourth quarter of 2021 were similar year-over-year, and general and administrative expenses were $15.5 million for the fourth quarter of 2021 compared to $3.9 million for the fourth quarter of 2020, mainly driven by higher non-cash share-based compensation expense and overall higher costs as a result of being a public company. Excluding nonrecurring items, free cash flow for the fourth quarter of 2021 was negative $27.8 million compared to negative $5.2 million in the fourth quarter of 2020. For the year ended December 31, 2021, the company reported a net loss of $141 million compared to the $56.6 million in the prior year. Backing out the aforementioned $8.5 million warrant liability adjustment results in a net operating loss of $149.6 million for the full-year 2021. The exploration expenses increased from $48.9 million to $93.0 million and G&A expenses increased from $7.7 million to $56.6 million when comparing 2020 to 2021. Apart from the higher cost structure as a public company, the largest increases, both in exploration expenses and G&A expenses, resulted from the issuance of stock options for DeepGreen employees and contractors in Q1 2021 before the business combination was finalized. The options granted in 2021 were awarded in lieu of cash bonuses to retain DeepGreen employees and further into the business combination. The DeepGreen board had the sole discretion to award these options and the exercise of this discretion to do so, as it is not consistently awarded cash bonuses to employees despite multiple years of service. Some of the options were granted subject to the achievement of significant long-term performance goals of DeepGreen, now TMC, and those remain invested. Finally, excluding nonrecurring items, free cash flow for 2021 was negative $51.1 million compared to negative $26.5 million in 2020. I'll now turn it back over to Gerry for some final comments before opening it up to Q&A.

Thanks, Craig. In closing, the supply chain breakdowns and unprecedented price volatility of 2022 have spotlighted the fragility of global metal markets like nickel. There should no longer be any doubt. Securing the supplies of critical battery metals is a matter not just of national security but of global security. Our strategy has always been to develop the polymetallic nodule resource through partnerships because it allows us to move faster and because it allows us to get into production in a capital-light manner. The two strategic developments we announced last week are very important milestones in that direction. At a time when the inherent risks of battery metal supply chains are becoming apparent, we have taken major steps towards derisking the world's largest estimated undeveloped source of battery metals. With that, we'd like to turn it back over to the operator for any questions.

First question comes from Jake Sekelsky with Alliance Global Partners. Please go ahead.

Hey, thanks for taking my questions.

Happy to.

So just looking at the Epsilon MOU, obviously a major derisking event, and I know it's early there, but do you have any visibility on when we might see results of the PFS? And then secondly, does the MOU satisfy all processing requirements from Project Zero?

Well, we're fortunate to have Vikram on the line, so he can help us answer some of those questions. Regarding processing, if I answer the back-end question first, as I mentioned in the presentation, we found there's an appetite for people to take delivery of our matte material. The matte that I hold in my hand before contains about 40% nickel, 30% copper, and around 4% cobalt. It's a very attractive product if you're a battery cell manufacturer. What we've heard from some companies is that taking that intermediate product can help them take steps out of the process, thereby reducing the per kilowatt-hour cost of production and can also deliver economic benefits to the more heavily invested in the R&D side of battery cell manufacturing. If we can get almost full payables for the metals contained in that matte material, but not have to run through the pyrometallurgical step, then that's a really important part of the process. But Vikram, I might throw it to you just on the timing of what we agreed on regarding the feasibility.

Yes. Thanks, Gerry. On the pre-feasibility side, I think it was already working on doing some basic engineering to get a more accurate number on the CapEx as well. We aim to finish the pre-feasibility report by September this year. At that stage, we'll be I would say plus or minus 10% on CapEx and have a really good idea on the whole project schedule of presentation and what we plan to spend to build it as well in India. I hope I answered your question.

Yes, that's helpful. Thank you. And then just to be clear, the MOU is just for Project Zero, correct? It doesn't restrict TMC from exploring discussions with other partners or looking at other locations for processing for other parts of the project?

That's correct.

Yes, that's correct.

Okay, perfect. And then lastly...

You can expect us to continue to explore all of the options. You know, I guess we see great potential in developing countries like India that have an insatiable demand for these important base metals. If you asked me five years ago, I probably would have predicted that we'd be doing a lot of this onshore processing in China, but that's obviously become problematic. A lot of the material we make is in manganese silicate. To do a lot of that onshore processing in a market that has such explosive growth in their steel industry appears to make a lot of sense to us.

Got it. Got it. Okay. And then just lastly, on the pilot collection program slated for later this year. I'm just curious if you're able to shed any light on the timeline for when we might see some environmental impact data start to roll in there.

Sure. We have collected a significant amount of baseline data, which we've submitted as part of our Environmental Impact Statement. We have submitted half of it, and the remaining portion will be provided as we receive reports from the many scientists working with us. We have an ambitious program to monitor the collector program that will take place in the third quarter. We will release many of those numbers as we submit the application. We are fortunate to have support from other contractors who have completed their trials. I showed you a video of the Belgian contractor with their machine, and they had a second vessel monitoring all activities and have begun reporting results that align with our expectations. We had DHI conduct much of our plume modeling, and the results from other contractors have matched our forecasts, so we believe we have a solid understanding of that already. Naturally, there will be unique learnings for us during that program.

Okay, that's helpful. That's all for me. Thanks again.

Thank you for the question...

Thank you, Mr. Sekelsky. Our next question comes from the line of David Snow with Energy Equities. Please go ahead.

Hi. Could you walk us through the model for 1.3 million tons a year of wet nodules selling price and the fee to your partner and any other costs if you could place starting with the selling price.

Sure. Yes, happy to take that one. The assumption, and we noted in some of Jared's comments, is that for that 1.3 million, the products would be nickel, copper, cobalt matte, and the manganese silicate product. First of all, the equation would be what payables would you give for those products as a percentage of the prices from those metals on the LME. We believe you would get 85% to 90% or more of LME pricing for that basket. One thing to keep in mind in terms of just converting wet nodules to dry, we've actually noted in prior disclosures that there's a 24% of moisture content. So when you're converting wet nodules to dry, we would multiply by 76%. Overall, for the products that we would intend to sell with Project Zero, total revenue per tonne would be roughly $700 at current metal prices.

700? In terms of dry or what?

That's for dry tonne.

Okay. And then on a dry tonne basis, what fee would you pay for the nodules to be collected and transported?

In terms of the collection and transshipment fee that we've agreed with Allseas, it would begin at roughly €150 per wet tonne, which if you convert to US dollars and then convert that to cost for dry tonne, it would approximate $217 per dry tonne. We have not given any detailed disclosure in terms of the onshore processing side of things, but it would be roughly $217 per dry tonne for the collection and shipment, and then roughly $700 per dry tonne in revenue.

And do you have any additional costs in getting it to the point of collection and transportation, or is that including everything on that $217?

So that's getting it to shore, but we would hope that we — sorry, can you repeat that?

You're breaking up, by the way.

That is everything in order to get it to shore. We haven't provided detailed guidance in terms of the cost per tonne for the processing element for Project Zero, but as we progress further along with our partner, Epsilon Carbon, we hope to be able to provide additional information in future calls.

All right. Okay. So that would give you the cost to shore. And ballpark processing costs would be half of that, or about one-quarter of that?

Yes, we're not…

Go ahead, Gerry.

No, that's — there'll be a healthy margin lift in it for us. We haven't released that data until Vikram and his team have vetted down some of those costs a little further. But of course, we have a firm idea where they are, but it's a little bit early for us to release those. Even at this small scale, the project, we predict will show some attractive margin.

And then is the — do you split the resulting profits 50/50 with Allseas, or how does that work?

No, no. As we mentioned, there is a royalty that will be paid to Allseas, on top of their costs. Their return is aligned with the metal value of the ore at the time. We released the numbers on the cost, and that would reflect the entire offshore cost.

Okay.

I think we're ready for our next question.

Thank you, Mr. Snow. Our next question comes from the line of John Katsingris with Wedbush Securities. Please go ahead.

Hello. Can you hear me?

We got you.

Yes, we can.

Hello. Sounds great. Thanks for taking my question. Just looking at, I guess, bird's eye view for 2022, the two or three key strategic initiatives or goals? Thank you.

Sorry. Did you say for 2023 or 2022?

2022.

2022, yeah. I guess the most important thing is — I really want to emphasize the importance of the deal we announced with Epsilon Carbon and with Allseas because they really provide the foundational stones for us to be able to deliver on our future production. Bedding those MOUs into binding heads of terms is going to be obviously important. Putting that aside, the collector trial in the second half of the year is clearly important. But it's important to recognize that Allseas has been up in the North Sea now, and basically, those trials have been going very well. You saw some pictures of the harvest being launched and recovered and operating on the seafloor. I guess the theme that I said on our last earnings call is that we can expect this year will be customer offtakes. The customer offtakes will come in two forms. They will come for our manganese silicate material. Vikram and his team are helping us in that regard with regard to local customers in India. As Vikram said on the call today, already, we're getting some very strong expressions of interest. The other offtake will be for the matte material. As I stated previously, our belief is that we will attract a consumer-facing brand into that. We already have an offtake with Glencore for some of the nickel and some of the copper, but having a consumer-facing brand way into this because if you're an EV maker, you're staying awake at night worried about availability, price, and sustainability of your raw materials. Clearly, those conversations have stepped up a gear this year due to global supply chain issues. I think that's probably going to be the one that people will look forward to. I'm super confident that we'll deliver on both of those for the manganese silicate and also for the matte material this year.

Thank you.

Thank you, Mr. Katsingris. The next question comes from the line of Malcolm MacDonald with Bank of America. Please go ahead.

Hey, guys. Just a quick question. I mean, you basically answered it a second ago, but if you could elaborate further just regarding customer offtake and Epsilon and how that would relate potentially to some other companies involved with Epsilon, that would be wonderful.

Well, Vikram, I might let you talk on the manganese side if you're comfortable.

Yes, sure. I'll take that question. On the manganese side, we've been discussing the material specifications with the payer alloys customers and steel customers in India. We'll be getting samples of the manganese silicate from the pilot plant that TMC has been running, and we'll be giving that to customers for further sampling. We expect that soon thereafter, we can enter into some MOUs with them to take that offtake as well. I think once the material gets with them, the sampling will go pretty fast, but the initial feedback has been very positive on what they're seeing on the specification side. So that's on the manganese side. On the Epsilon side, we also manufacture graphite for lithium-ion batteries, whether it's EV or ESS. We're very plugged into the whole ecosystem of anode, cathode, and from a precursor to a CAM. We understand this space very well, so it's a very natural fit to work with TMC and develop this unique way of getting nickel, copper, and cobalt into the sector.

Thank you very much. And Gerry, just one question. I mean, how much interest have you guys gotten just in light of recent nickel prices from other potential offtake customers. I mean, has it been out of this world or?

Well, I wouldn't say it's been out of this world, but we are talking to a number of automakers, and it served us very well by not entering into those agreements previously because, of course, customers want to secure an economic benefit, if they're the first in or if you're some years away from production. Every day that we get closer to production, of course, world events as they have unfolded have started to make automakers panic just a little bit. It's not just automakers; it's other industries looking to secure their supply of these materials, including, of course, the intermediate players. We're feeling pretty confident about where we stand at the moment. We're not panicking about trying to get a deal done for the sake of getting it done. We've been very deliberate about saying we will do the right deal at the right time. Every day that goes by, we're gathering more and more environmental data, which we're sharing as soon as we can because it's consistent with our belief that making battery metals from these polymetallic nodules comes at a much lower environmental and societal cost. The more that we gather these results, the more confidence it gives us, and of course, our customers. Consistent with what I said before, I'm sure that by the end of this year, I'm confident that we will have one of those consumer-facing brands marked down as one of our customers. Having the Epsilon Carbon partnership is also really important to us. We've spent quality time working with Vikram's team over the last few months. Recently, we toured their facilities in India; their focus on ESG and efficiency is evident, and coupled with their relationship with the JSW Steel Group serves as a reminder that our manganese product is so important to any growing economy. We talk about battery metals, but manganese, of course, is required to make every ton of steel on the planet. As I mentioned in my presentation, we're now seeing the EV industry look at using more manganese in battery cathodes as well. That's very encouraging for us and for the industry as they try to control costs in moving raw materials that are in short supply.

Thank you very much.

Thank you, Mr. MacDonald. Our next question was submitted by Peter Fiorella, and the question is, what is the estimated date of completion on the pilot trial?

We're not releasing that date for security reasons. The first trials were completed in the North Sea very recently. What we have announced is that the trials will happen in the third quarter. We expect to see the Hidden Gem back in port by the end of the year.

Thank you. The next question was submitted by Jacob Basel. The question is, if I am not mistaken, TMC currently has plans for processing plants to be located in Texas in the future. Could you comment if this indicates strategic placement for potential offtakers?

We have been exploring where we would locate our processing plant. By all means, we have not given up on the idea that one day our processing plant might exist in Texas. But our first priority is to get our first processing plant up and running. Our intention is to do that in collaboration with Epsilon Carbon, and that first plant will be in India. Will a future plant be on US soil? Maybe, it would make sense to, right? I mean, you heard all the statistics I talked about in my presentation. But there seems to be a lot of talk and just not as much action coming out of the US as we're seeing in some other markets.

It's worth mentioning that we've seen the news today from the Biden administration drafting an order invoking the Defense Production Act for critical metals based on feedback from several US Senators. There is a lot of momentum within the US, and frankly, there's a lot of other jurisdictions wanting to locate this battery material processing onshore. It's very important for TMC, as we look to get into first production with Project Zero to find a first partner who is very supportive and as a country and government that's very supportive as well. The statements and initiatives, and capital investment from Prime Minister Modi underline the welcome reception that we've been receiving in India, and we're looking forward to continuing that relationship.

Great. Thank you. There are no additional questions at this time. That concludes the Metals Company's Fourth Quarter and Full Year 2021 Corporate Update Conference Call. Hope you all enjoy the rest of your day. You may now disconnect your lines.