TMC the metals Co Inc. (TMC) Q2 2023 Earnings Call Transcript

Good day. And welcome to The Metals Company Second Quarter 2023 Corporate Update Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, this call is being recorded. I would now like to turn the call over to Craig Shesky, CFO. You may begin.

Thanks, Michelle. Please note that during this call, certain statements made by the company are going to 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 our Safe Harbor provisions for forward-looking statements that can be found at the end of our second quarter 2023 corporate update press release. Such statements may also be found in our annual report on Form 10-K for the year ended December 31st, 2022, and other reports subsequently filed with the SEC, including our 10-Q for the quarter ended June 30, 2023, all that 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 otherwise required by law, we undertake no obligation to update any forward-looking statements. 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 on our slide deck used with this call. And, of course, you're welcome to follow along with that slide deck. Or if joining us by phone, you can access it at any time at investors.metals.co. Now, first of all, I'd like to say thanks to everyone for joining on this quarterly update conference call. Given all the news flow and progress in the last few weeks, June 30 does feel like ages ago when we ended the quarter. So before getting into the presentation and turning it over to Gerard, of course, he's been on the road nonstop this summer building support for TMC, we'd just like to remind you of some of what's happened in July alone in this industry. First of all, there were multiple articles from The Economist magazine in early July, which concluded that the time is now for the responsible collection of seafloor nodules. This assertion was followed by an interview in The Guardian showing strong support for seafloor mining from director and deep-sea explorer James Cameron, who's personally completed 75 deep dives and seen more of the seafloor than pretty much anyone else on the planet. Importantly, in the US, there was the passage of the House version of the National Defense Authorization Act in mid-July, which prioritizes the delivery to plan on nodule processing and refining from the Pentagon, followed up with a letter from nine congresspeople to the President and the Secretary of Defense imploring the White House to focus on nodules as a matter of national security. Finally, we saw the conclusion of the July ISA session in which a compromise was reached between member states to continue work on the final rules, regulations, and procedures, also known as the mining code, over the next three sessions in November 2023, March 2024, and July 2024, after which point TMC subsidiary, NORI, intends to submit an application to the ISA for an exploitation contract for NORI Area D. Very importantly, the ISA reiterated their obligation to consider a plan of work when we're ready to launch it in consultation with their sponsoring state. And NORI does reserve the legal right to submit an application before final regulations are in place. Now, focusing very quickly on the ISA picture, of course, we would have liked to see the ISA fulfill their legal obligation to deliver the mining code in 2023, as they previously targeted, but we believe that the hard-won compromise reached in July has increased our regulatory certainty. As we've always said, we will not submit an application for an exploitation contract over the NORI Area D until we finish a world-class environmental and social impact assessment, including an environmental impact statement as a key component of our application. So considering the initial results that are starting to roll in, particularly on biodiversity and food impacts, we are confident that NORI's application will show the ISA's legal and technical commission, the ISA council, and stakeholders around the world that nodule collection can be done responsibly and at a scale that moves the needle in the quest for new sources of these metals, which are needed, of course, for the clean energy transition. So on to the agenda. Today, we'll take you through the following items: Summary of the recent corporate news, including the capital raise at $2 per share, a brief market update, a reminder of TMC's value proposition, further detail on the regulatory front, review of the environmental case for polymetallic nodules based on some of the information that's been coming through, and finally, our financial update. So following a very eventful July, TMC released a corporate update on August 1, laying out the estimated project timeline to production, cash needs, and developments related to the Project Zero offshore system. As shown on the slide here, TMC subsidiary NORI intends to submit an application to the ISA for an exploitation contract over NORI Area D, following their July 2024 meeting. Assuming a one-year review process and approval, NORI would expect to be in production in the fourth quarter of 2025. So as the ISA continues the regulatory work, NORI will continue with scientific work. Based on the feedback received from the ISA's Legal and Technical Commission, we're now going to accelerate the timing of a new post-collection test campaign this year, focused on the environmental regeneration of last year's collection test area, during which 3,000 tons of nodules were successfully lifted to the surface. We believe this environmental campaign will ultimately strengthen the quality of our application. Our partner at Allseas will also use the time well, with NORI and Allseas now planning for increased production capacity for the Project Zero offshore system, using the Hidden Gem vessel and adding a second collector vehicle from an estimated 1.3 million wet tonnes per annum to a new estimated 3.0 million wet tonnes per annum, a potential increase of 130%. Of course, to deliver a high-quality application for an exploitation contract, we told the market on August 1 that we would need an incremental $60 million to $70 million cash on top of our existing cash balance, but not yet including any drawdown on the existing $25 million Allseas unsecured credit facility that was extended through November of 2024. So the next slide walks through some of the liquidity and capital resources we have at our disposal. We have been very clear that we prefer to raise the majority of funds needed to reach first production at the asset level, potentially through earnings or stake sales, offtakes or royalties. However, these asset-level discussions do take time, and as those discussions continue, we do need to keep the pace up on the milestones being delivered, including the recently announced acceleration of that post-collection test environmental campaign. So we made the decision to raise some funds at the TMC level to keep the development of this world-class asset on track. This morning, we're happy to announce a capital raise of approximately $27 million in gross proceeds at $2 per share alongside a half warrant with an exercise price of $3 per share and a forced exercise, also known as a call provision, if our share price trades above $6.50 for at least a 30-day volume-weighted average period. There's also the potential for raising up to an incremental $11 million by mid-September at the same terms. This right was granted to the investment advisory clients of certain participants in this transaction with the extra time to allow for some additional compliance documentation. In the current market, the vast majority of follow-on offerings are issued at discounts to the current share price. The execution of this transaction at an 82% premium to Friday's close is a major show of force by both our existing and new investors. So, again, we'd like to thank everybody who participated. I know Gerard would like to thank some of them as well. Gerard and I both participated in the offering as the double directors, our partner Allseas, and one of our single largest shareholders, Andrei Karkar. And with that, I will turn it over to Gerard to walk you through the rest of the presentation. Gerard, please go ahead. Michelle, have we lost Gerard? If so, as we're trying to get him back on, I'd be happy to continue with the presentation.

Gerard, you may be muted. He's still connected. Gerard, I'll go through some of the slides here. And if your connections better, feel free to interject. I know it must be hard doing this while being on the road. But on to the market update. We tried to do our best to avoid all the media noise around TMC. But we did feel a shift in media coverage during the last quarter. The Economist took what we think is a brave and considered position on the topic with a series of articles in support of nodule collection, as well as an analysis of the inevitable social and environmental damages of alternatives, like Indonesian rainforest nickel. No less striking was the news that film director and prolific deep ocean explorer James Cameron spoke out in favor of mining seafloor in The Guardian as a means of taking pressure off of terrestrial ecosystems and human communities. To quote that article directly, he said, 'I've seen an awful lot of seafloor. And while there are some amazing creatures, they tend to be clustered in small habitats. What you mostly have is miles and miles of nothing but clay.' But mining in highly sensitive and highly diverse habitats is a very, very different thing from mining in the abyssal seabed. The impact on actual human beings, on actual indigenous cultures that are being destroyed, their tribal lands being destroyed, the habitats that they require to survive being destroyed, it's pretty horrific. And we agree – and we expect that more thought leaders will continue to come out of the shadows and present nuanced, science-driven views on this topic, rather than activist narratives. Interest in our industry from countries and companies continues to grow. Last quarter, we discussed a handful of these developments, including news that Norway was preparing to open its CCZ to mineral exploration and that offshore leader Transocean would be providing a Samsung 10,000 drillship for conversion into a nodule production vessel ahead of Belgian contractor GSR's integrated system test currently scheduled for 2025. There have also been many headlines around China's decision to step up deep-sea nodule exploration and their increased involvement in ISA activities. This has mobilized action elsewhere around the world, including Washington, DC. Congressional leaders have actively been engaging the Biden administration and Defense Department on the topic of seafloor resources, urging them to ensure nodules are assessed as a viable resource, secure critical minerals, close supply chain vulnerabilities, and counter increasing Chinese investments in the space. Last month, we were delighted that the Department of Energy's inclusion of polymetallic nodules as a means of increasing basic supply availability of critical minerals in its critical material assessment. As the US looks to its allies for support in this endeavor, the US-Japan critical mineral trade deal that was signed in March dovetails perfectly with our own intention to process nodules initially with PAMCO in Japan, and that paves the way for downstream consumers to retain the EB credits from Japanese supply. And I believe that Gerard has joined us again. So, Gerard, I might turn it back over to you if we can you, go into the value proposition slide.

So on to our value proposition. These slides should be familiar by now, so I'll go over them quickly as a reminder on our resource size and resource grade. Our NORI and TOML areas contain in situ quantities of nickel, copper, cobalt and manganese equivalent to the requirements of about 280 million vehicles or roughly the entire US passenger fleet. In March, mining.com released their updated 2023 rankings of the world's largest undeveloped nickel projects, and the top two remain the same again this year, TMC's NORI at number one and TMC's TOML at number two. An axiom within the resource sector is that a resource needs to be either very large or high grade to be successfully developed and profitable across commodity cycles. TMC is an outlier among peers with the largest nickel equivalent resource and the highest grade, with the NORI D nodules having a nickel equivalent grade of 3.2% with four key metals in the same resource. It's likely that it would have been tapped ages ago if the resources occurred on land, where grade for metals like nickel and copper have been going down for decades. Several consortia attempted to develop this resource in the 1970s, including BP, Shell, Sumitomo, and US Steel, among others, successfully collecting thousands of tons of nodules and processing them. However, there was not a regulatory environment to allow the exploration and then the exploitation of resources in international waters. We now have the former and expect to have the latter soon. I'd like to now play a short video summarizing the ISA structure and the application process. For those on the phone, the video is just under three minutes long. So at the end of July, the ISA closed part two of its 28th session. While some were waiting with bated breath for a thumbs up or thumbs down, the reality is that this is an ongoing process and one that the ISA members are legally obligated to fulfill. It’s not a question of if this new industry begins, but when. We were pleased to see the high level of motivation and collaboration among ISA members and the significant progress made in Kingston, for which I would like to express my sincere thanks to all member states. The fact is, this is a massive body of work. Given the nature of multilateral negotiations, it was clear the parties need more time to fulfill their legal obligation of delivering the mining code. After carefully listening during last month's ISA meetings, NORI now intends to submit an application following the July 2024 ISA session. This will give us more time to strengthen our environmental dataset through an additional offshore campaign to measure ecosystem recovery one year on from our 2022 integrated system test, while providing time for the three additional sessions and intersessional work outlined under the ISA's agreed roadmap for adoption in 2025. The latest ISA meeting, as in prior sessions, saw a clear majority of participating states expressing their continued support for negotiating robust regulations that ensure the protection of the marine environment. 21 ISA member states, representing a minority of the 169 ISA members, under strong pressure from NGOs, have called for a precautionary pause or moratorium or, in one case, a ban on deep sea mining. However, the legal obligation on member states to deliver the mining code has not changed, and this obligation was reiterated in July, following a compromise consensus decision reached. We believe the finish line is now within sight, and we look forward to the consolidated regulatory text at the next meeting in November this year. While media reporting often only focuses on countries highlighted in yellow, sometimes ignoring entire continents, the UN Convention of the Law of the Sea and the 1994 implementation agreement are documents that are legally relied upon by developing member states, such as our sponsoring states, Nauru and Tonga, who through this system have a means to participate in this new industry and help solve a climate change problem which they did not create. Turning to our environmental program, we've engaged some of the world's leading marine research institutions and expert industry contractors. In 2022 alone, we gathered over 200 terabytes of data, largely as a result of our successful integrated system test and environmental monitoring campaign to provide verified infield data as to the environmental impacts of collecting nodules. This wealth of data can be added to that compiled from the 17 offshore resource definition and environmental baseline campaigns that NORI has conducted over the past decade, data which has now been published in peer-reviewed papers and made available via public databases. In July, we announced that data submitted by NORI to the ISA's deep data platform had been published to the Ocean Biodiversity Information System, or OBIS, platform, the world's largest scientific knowledge base on the diversity, distribution, and abundance of all marine organisms. With data from just two of NORI's 17 campaigns now available on OBIS, NORI has become the single largest data provider to OBIS ISA node, providing 60% of total records. As one of the largest funders of scientific research in the deep ocean, we're delighted that our investment of time and money is paying off and we look forward to sharing additional data from our campaigns as well as all remaining data concerning ocean geochemistry, symmetry, and pelagic biodiversity in the coming months. While we go through the labor-intensive process of analyzing this wealth of information, the benefits of making this open to society are clear. Since publication in July, NORI's total dataset has been downloaded some 300 times, and specific interrogation of taxa has seen NORI occurrences downloaded over 22 million times. In addition to biodiversity, another key impact we consider is the impact of sediment plumes during and after nodule collection. While speculation continues to cloud the water as to the environmental impacts of sediment plumes, multiple lines of evidence are now providing a much clearer picture as to how far these plumes are distributed. Leading experts in the field of deep-sea sediment plume dynamics, led by Professor Thomas Peacock at MIT and researchers at Scripps, have found that 92% to 98% of sediment disturbed during offshore system trials conducted by fellow contractor GSR remained within two meters of the seafloor. As they noted in the conclusion to their study, it presents quite a different picture of what these plumes look like compared to some conjecture. On our own ground, in the NORI D area, preliminary findings by leading experts at DHI support our expectations. Our teams had over 50 monitoring stations to monitor every aspect of the plume and noise during NORI's collector trials last year. Using this data, DHI has built a model that brings some clarity to how plumes actually behave at these extreme depths. I'd like to show you a short video clip of this plume. Based on preliminary plume data collected during last year's test mining, this video highlights that a combination of flocculation, impeded water movement at the seafloor, and the formation of a density current where the mixture of water and sediments spreads under its own weight, not through transport from background currents, have a profound effect on plume dynamics. The cloud represents the plume generated, and the colors show different densities, with yellow representing the highest density of sediment particles and purple the lowest. The purple and blue bands represent sediment concentrations of less than 20 mg/liter, which would not be visible to the naked eye. It's important to note here that the disturbed sediment settles rapidly, with early projections indicating that impacts from the plume will be highly localized around the mining footprint and are highly unlikely to extend beyond the boundaries of the contract area as previous speculation has predicted, speculation based on zero infield observation. The final results of NORI's plume study will be released in the coming weeks, but based on these preliminary findings, we are seeing a radically different picture compared to some colorful claims put out there by activists. This is a still image from the Blue Peril film, with speculative modeling of plume impacts in the TOML exploration contract area denoted in red. It's meant to look as scary as possible. However, we are now gathering infield observational data that shows a very different reality. Preliminary data collected on plume generation during our test mining indicate that the combination of flocculation, impeded water flow movement at the benthic boundary layer, and the formation of a density current at the seabed have a profound effect on plume dynamics resulting in rapid settling of disturbed sediment. Early projections indicate that impacts from the plume will be highly localized around the mining footprint and are not predicted to extend beyond boundaries of release. This new information makes the plume models that have not been informed by actual data collected during test mining simply uninformed, highly speculative, and gross exaggerations of the expected situation. We've taken you through how we think about measuring and mitigating the absolute impacts of nodule collection, but it’s also important to consider the relative impacts. For nickel, the country with the highest production also happens to be one with the highest species richness – Indonesia. In contrast, the abyssal desert is the planet's most common ecosystem covering over 50% of the Earth's surface. While it does have some important biodiversity, the biomass, the amount of life on the seafloor at 4 kilometers to 6 kilometers depth, is a fraction of the amount of life, for example, where nickel laterites are found and even less than that found in our deserts on land. In the absence of sunlight, this is a region with zero flora. What fauna there is must contend with extreme pressures, low temperatures, and poor availability of food at depths of over 4 kilometers. A lower quantity of biomass to be impacted is just the beginning of what sets nodules apart from conventional metal production on land. We recently released the results of a lifecycle assessment conducted by Benchmark which compared the NORI Area D project to key land-based production routes, representing upward of 90% of the supply for nickel and cobalt, and roughly 60% for copper. The NORI D project outperformed all terrestrial routes in all impact categories assessed, including global warming potential, water consumption, and waste generation. We believe the potentially lower carbon equivalent emissions level of sourcing key materials from nodules will ultimately drive customers our way, particularly as we continue releasing data from the ESIA, which supports findings from Benchmark. With the development of battery passports and other initiatives like carbon pricing, customers will need to compare the carbon footprint of a kilogram of nickel produced from TMC nodules with that same kilogram produced from mines on land. Thanks to science-based tools and studies such as that prepared by Benchmark, we believe the case for the nodules is very strong.

Thanks, Gerard. As shared in all of our previous update calls, in March 2021, AMC Consultants issued an SEC Reg S-K 1300 compliant initial assessment of the project economics in the NORI area. This initial assessment is available in the Investors section of our website. The NORI Area D financial model can be found beginning on page 310 of that document. The initial assessment arrives at a net present value of $6.8 billion for NORI D at the beginning of last year. Running the same model, simply updated for current metal prices, the net present value of NORI D would be approximately $10 billion today. Yet, the market cap on Friday's close represented only 3% of that fundamental asset value, again, on what is only 22% of our total estimated resource. This compares to a pure nickel developer average of 38% of that price to fundamental asset value. Cutting through all the noise and all of the narratives, the resource is the resource. For TMC, an investor can get exposure to the largest and second-largest nickel projects in the world at roughly a 90% discount for what you might pay on average for the same amount of this critical metal from land-based developers. So what might happen to begin to change this valuation gap? This page lays out some of the critical milestones ahead that can lead to re-ratings in our public valuation. The capital raise we announced today is certainly a sign that these new and existing investors, who know TMC very well, are increasingly convinced of the likelihood of these milestones being achieved, including reaching definitive commercial agreements with our offshore and onshore partners, continued progress from the ISA which Gerard discussed at length, NORI submitting an exploitation application for NORI Area D following the July 2024 ISA session, the ISA eventually granting NORI an exploitation contract, and then the beginning of commercial production shortly thereafter. On to our financial results for the second quarter. TMC reported a net loss of approximately $14.1 million or $0.05 a share in the second quarter of 2023 compared to a net loss of $12.4 million or $0.05 a share for the quarter ended June 30, 2022. Exploration and valuation expenses during the quarter ended June 30, 2023, were $8.1 million compared to $10.2 million for the quarter ended June 30, 2022. The decrease was primarily due to a reduction in share-based compensation, a decrease in spend on the PMTS and environmental studies as the collector test was completed in November 2022, and reduced exploration activities in 2023. This was partially offset by an increase in the 2023 period on prefeasibility studies and mining, technological and process development due to engineering work, which commenced in the fourth quarter of 2022. G&A expenses were $5.1 million for the quarter ended June 30, 2023 compared to $8.1 million for the quarter ended June 30, 2022. The lower spending in the second quarter reflected lower share-based compensation and a decrease in insurance costs incurred during the second quarter of 2023. This decrease was partially offset by an increase in personnel, travel, and other expenses. Second quarter 2023 results include a loss of $0.8 million for the change in the fair value of the warrants liability compared to a gain of $5.7 million in the comparative quarter of the prior year. Free cash flow for the second quarter of 2023 was negative $8.5 million compared to negative $22.9 million in the second quarter of 2022, reflecting an operating loss of $14.1 million, an increase in payables, a decrease in prepayments of $2.1 million due to timing, partially offset with equity-settled expenses of $3.5 million. On to the balance sheet. As of June 30, 2023, TMC held cash of $20 million and held no debt. We believe that our cash on hand, along with the equity raise we just announced and the borrowing availability under our recently extended credit facility with an affiliate of Allseas, will be sufficient to meet our working capital and capital expenditure commitments for at least the next 12 months from today. I'll now turn it back over to the operator for some questions. Then, Gerard, we can probably save your closing remarks for after the Q&A.

Our first question comes from Dmitry Silversteyn with Water Tower Research.

Congratulations on the new financing that you guys were able to arrange. Maybe I will start there. You're a company that's got to spend a lot of capital going forward to get your project online. Typically, when companies like that try to raise capital, it's unusual for them to get a premium to their stock price, let alone a significant premium as you've gotten. And then, obviously, with the warrants being at a higher price. Can you talk about what you think it says about the smart money and how they feel about the business that you're in and the opportunities in front of you? What was it really that drove the confidence in the investors to sign on to this term sheet with such a high premium to the current stock price or to the stock price as of yesterday, I should say, or as of Friday?

Happy to answer first, and Gerard can weigh in as well. I think the asset is the asset. This is a very, very large resource that we're developing and very high grade. I think there's a recognition that, certainly, from our existing investors, partners like Allseas, largest shareholder and director, Andrei Karkar, but also there are institutional investors who have really been building positions over the last year who recognize that this is a portfolio of metals for one single resource that are increasingly important for the clean transition. The political tailwinds are blowing the right way. We've now derisked the offshore technology. We've derisked the onshore technology. We've signed up additional partnerships to get us in production. You said that there would be a lot of capital, but I would say capital relative to what – you're measuring in terms of per tonne of metal. It's actually a very small amount of CapEx needed to get this project into first production. I think there's also a bit of a technical dynamic here too, though. Obviously, after going public, it's been a very rocky road in the public markets. But there has been a lot of rotation away from people who were perhaps traditional SPAC investors to now building back up an institutional investor base of folks that can see the long game. Once you talk about all the derisking milestones we've achieved, we're now narrowing into one key question, which is when is the final code coming and when is NORI going to apply and begin first commercial production. So you've really narrowed a lot of those risks down to that process question. I think we now have more clarity on it. Yes, it's disappointing to see elongation on the timeline. But we think there's more certainty now associated with that timeline. So what probability weight are you willing to put on us getting that contract approval to begin work? As we see more environmental data, we think it's very high. Being able to apply that to a very undervalued asset based on NPV leads to a recognition that the share price should be higher. I think the capital raise reflects that.

Talking about financing and kind of staying on this topic one more time. Just slide 7 where you provided your liquidity capabilities did not include this $27 million raise or potentially $38 million raise on the exercise of an $11 million more in stock and warrants. It's part of the $30 million shelf registration, I would assume. So is that where I actually be deducting it when I'm thinking about your total capital raising capabilities?

Yes, that's right. And, obviously, upon the exercise of warrants over $3, that would be more cash in the door as well. But that's right. Capacity on that $100 million S-3 shelf.

You mentioned political headwinds and tailwinds changing a little bit. We're kind of seeing a carrot and a stick a little bit here, with the carrot perhaps being the US government or at least the Article 1 part of the US government getting more concerned about American independence from China. Then, obviously, you have the stick of China becoming much more aggressive in pursuing this type of resource. How much do you think that will have an impact on the discussions by the ISA over the next three sessions? How do you feel about the probability of getting a mining code to the point where you can submit your application and have it evaluated with a reasonable chance of getting approved?

Look, I think the reason that we mentioned we would not launch the application until after the July session next year was really a show of good faith on our side because we didn't want member countries to be looking over their shoulder, thinking that an application might land on the desk tomorrow. What we want everyone focused on is completing the mining code. People have said we'd like the mining code to be in place. But of course, Article 15 was introduced into UNCLOS in 1994 for a very express purpose. We maintain our legal right to launch that application. We're confident from where we sit that combined with the more than a dozen intersessional working groups, plus three more sessions where the ISA member states will meet, that should be enough time to get the mining code completed. I guess what we did was read the room there. Geopolitics is playing heavily on all of this. It was nice to see China be so forthright, is probably the right word, down at the ISA. Of course, they weren't alone. You had Japan, Korea, Singapore, Norway and the African group, Argentina, and Mexico. There were many. People wonder when they hear certain countries joining moratoriums, and they're not saying they don’t want to see this happen. They're saying they would like to see the mining code in place. Hey, so would we. The vast majority – keep in mind, there are 168 countries plus the European Union. We're talking about 21 of them have stuck their hand up to say, hey, we'd like to see a cautious pause. But I think that as we display the environmental evidence we are gathering, if those results remain consistent with how they're looking today, then I know that will engender confidence because there's another big dark cloud, and that dark cloud is what's happening today. For some reason, people in the ocean community don't want to think about what's happening on land today to secure these metals. Today, I'm in Jakarta, which is where all of the growth in nickel production is coming from. It is coming at a very high price. It's coming at the cost of destroying the sequestered carbon in those biodiverse rainforests. It’s coming at the cost of pushing out indigenous communities, generating lots of waste and tailings. I believe that as our scientific evidence becomes more publicly available, it will produce a groundswell of support heading in this right way. Geopolitics will certainly help there. It was encouraging to see the NDAA language recently. It's encouraging to know that the Secretary of Defense is focused on evaluating, as he was requested, what are the opportunities to process nodules on North American soil, so they can secure mineral independence. All of these things help. We are in a unique situation because when land-based projects get a mining permit, they have to go out and build a heap of stuff. They've got permitting risk on construction and must finance that construction. We, however, have identified how we can process our nodules using existing infrastructure. This means we don't have that land-based permitting hurdle to jump over. We already have our first production vessel, which Allseas are working feverishly on converting to a production vessel after the trials last year. These are advantages that we need to get better at communicating. The important thing is that more scientific evidence is going to build much more confidence, creating a very, very different scenario, like I described in the plume. It’s one thing to speculate on what might happen, but let's get the data and scientific evidence to make better and more informed decisions. The wrapper of that is geopolitics, and I think that's only going to help us move forward.

One more question talking about the year that you're going to be putting to good use before you apply for the exploitation permit next summer or somewhere around there. You're looking to more than double the capacity of your Project Zero, you're going to generate – I guess I'm assuming with these two collection vehicles and assuming the pricing of metal stays kind of where it is, about $1 billion in revenue or so. You need about $60 million to $70 million more to get to the point of the application. Can you parcel that $60 million to $70 million in terms of breaking between the environmental study that you're going to be conducting in the areas where you already mine, the operating expenses that you're going to be incurring over the next year, and then the cost of basically more than doubling the capacity on Project Zero CapEx? In that $60 million to $70 million, how would you partition between those main buckets?

I'll let Craig answer that question in detail. But before he does, just one thing. We don't have any growing concern, and I'm sure we won't have next quarter either. We do have cash and facilities available to us to get past that submission point of the application. But I'll hand it to you, Craig.

Dmitry, that $60 million to $70 million of cash was from the August 1 8-K. Obviously, the incremental amount we need to raise is reduced dollar for dollar for what we are raising now and what we may raise with this sort of additional closing potentially by mid-September. With respect to the current cash and what is needed to fund us to that application, I would say roughly about half of the costs are related to the application itself, finishing our environmental and social impact assessment, and prefeasibility work. Obviously, there are some regulatory costs in there as well. But the single biggest component of that application cost is the environmental and social impact assessment. We are talking of nearly $150 million that would have been spent on it by the time it's complete, which would include the additional campaign that we are accelerating. It's important to note that this campaign, the post-collection test campaign, was always going to be part of our plans. It was just going to be a bit later on as part of our environmental monitoring and mitigation program, as opposed to doing it pre-application. The remainder of the cost obviously includes payroll, G&A, and some costs to keep the Hidden Gem available. We're going to be talking with our partner Allseas quite regularly over the coming months. As we've laid out, we expect to reach binding agreements with them by the end of the year. So it's a lot of different things we laid out there. But I would say about half of it is related to the application itself, with the majority being environmental spending.

The other point I would make is – or I would guess question is, you generated – you've spent about $5 million on general and administrative expense in the quarter, which is close to where you thought your bare bones run rate would be if you needed to wait out the ISA and make your cash stretch. You've gotten some financing, obviously, now. So it's not as big of a deal. But it's good to see you getting to that $4.5 million, $5 million run rate. And I think it sort of confirms what you've been telling people as far as your ability to remain in the game while waiting for this application to get done. The only question I had, I guess, is you mentioned that some of the savings or some of the warrant savings year-over-year were offset by the cost of the prefeasibility study funding and increased mining and technological and process development. You said that was related to the PAMCO affiliation trials that are going on. If so, how are those going and when do you see those getting completed in some sort of more formal arrangement made between you and PAMCO, if it goes that far?

Yes, that was part of it, Dmitry, some of those PAMCO studies. With respect to how it's going, we've had a team spend quite a bit of time in Japan recently. We also delivered an initial 22-ton sample of nodules to PAMCO. They've been making a lot of progress. Gerard, perhaps you can speak a little bit about where that’s going and what we see on the timeline.

We expect to have something binding in the second half of this year, Dmitry. So far, we've not run into any roadblocks. The PAMCO team has been a delight to deal with. They are very motivated, as are we. As we've said on past earnings calls, there are other options that we have beyond PAMCO where we could grow into as well. We see Japan as being an important partner in the future. They're certainly very focused on securing supplies, given their neighbors. We like the idea of having in situ processing of nodules up in Japan. There are certainly other growth opportunities, but I'm confident we'll progress that agreement in this half, Dmitry.

Our next question comes from Malcolm McDonald with Bank of America.

Congrats on the quarter. Dmitry hit everything that I was basically going to ask, but just in terms of balancing the nickel market, we're probably balanced through 2025. But then afterwards is the fat question mark. Does the ISA have the ability to expedite the code in the event that the nickel market becomes unbalanced?

Look, it's fair to say the ISA has a process. We've tried to speed that process up a little bit back when Nauru launched the two-year notice. We then went back and said, hey, we’ve heard the room, we're going to not launch an application until after the third session, which will be in July next year. My observations on the nickel market are that we've told the market that we hope to plan to be in production at the end of 2025, which is perfect timing. As I mentioned, I'm in Jakarta today. We talk to customers, we know what that supply looks like. I believe the nickel market will be marginally oversupplied in 2024 and 2025. Speaking to all of those customers, they are panicking about what's going to happen after that. Even Indonesia has publicly stated that they're worried about running out of high-grade nickel as well. Please, God, that never happens. If it does, it means there’s going to be enormous deforestation at a rapid pace in countries like Indonesia, New Caledonia, and the Philippines. I hope that as we start to increase supply of nickel into the market and potentially even supply nodules into some of the onshore processing operations here in Indonesia, we believe that will help shape the market balance.

Operator, can you tell us if Gerard is still connected? In the meantime, Malcolm, regarding the nickel market, just focusing on total supply versus demand tonnage, obviously, there's going to be increasing focus on battery passports, and that's already coming in Europe. It'll keep coming elsewhere, including North America, noting that there's going to be a benefit to having lower carbon nickel. We expect the ISA to stick to their timeline. This isn't just a code being put in place for polymetallic nodules; it’s the code that's going to protect the marine environment.

We're having a few technical difficulties on the platform. But, look, I think the nickel market is primed. We sometimes hear people talk about the fact that other battery chemistries might decrease the demand for nickel. That's wrong. The demand for nickel is growing. Even if things like LSP take more market share as they have over the last several years, the demand for nickel has grown enormously during that time and will continue to grow because, no matter which way you look at it, nickel-rich chemistry brings benefits. If we could find a more affordable, reliable, and lower impact supply of nickel, then the world is going to be a better place. There's no doubt about that. The timing of us bringing this supply into the market is perfect.

I think probably in the same vein as some of these questions around financing. Is there any update you guys can give on the timing or scope for the Bechtel prefeasibility study? The reason I ask is the goal or part of the goal of that study is to be able to reclassify the resource as reserves and then use said reserves as assets on the balance sheet to raise capital beyond the $60 million to $70 million you need to get to application. I guess the last question on that topic is, when you think about the value of those reserves, should they be proved or probable? Is it the value of the refined metals or raw nodules? Do you have any insight as to how the feasibility study will think about those reserves?

Well, maybe provide a little context on Bechtel. Frank, I think post prefeasibility, we're going to be looking forward to releasing an updated model. We've been relying upon and directing investors to the AMC initial assessment from March 2021. We recognize that it's looking at steady state production for the Project Zero and Project One combined. It'll be important, especially with a larger capacity production system of 3.0 million tons for the Hidden Gem, to lay out what those economics look like for the first system. I anticipate that because we don't yet have a market for nodules themselves, we'd be looking at the contained metal within and then putting reasonable assumptions based on some of the binding term sheets we're anticipating reaching with Allseas and PAMCO and our partners to fill in those gaps.

That prefeasibility will form part of the application, of course, so you can assume that it will be available before or as we launch that application. There's no doubt that moving to proven reserves does increase our financing options. As Craig mentioned, the value applied to them would be based on the deals we sign on the processing side. Our plan is to process to an intermediate product, process to a matte material for nickel, copper, and cobalt and manganese silicate. We're looking forward to sharing those. We’re encouraged by what we see at the moment. As we put those agreements from non-binding to binding, it's going to help fill out the pieces between the published PEA available on our website and what the ramp-up in production looks like.

Is there any indication or do you have an indication for cash needs beyond application between submission of application to the ISA and then beginning with Project Zero?

We are still focused on – and one of the reasons why we did a fair-sized raise that we announced today – we could have gone and raised more. I'm confident that we could have easily done that. We do have other financing options available to us, of course, but the main investment will be the further adaptation of the Hidden Gem. We're fortunate that Allseas' core business is in fantastic financial health. They're committed, as you can gauge by their participation in all our financings since 2019 when they first invested in the company. This for them is an exciting project. They're using their 37 years of deep-water engineering expertise to move into a new vessel. Talking to their engineering teams, they are very excited about this project. We believe we have several financing options and we've walked through them on previous calls. They include earn-in, prepay, streaming deals, offtake agreements, or may include equity into the project itself. We have a lot of people that we're talking to. We will continue to talk to them. Every time we move a little closer to that production, there’s more certainty. Even though some saw the announcement after the ISA share session as a delay, to strategic investors, it added more certainty. So, we will continue to explore all of those. My message to shareholders is we really care about the equity. We want to protect the equity, and we're grateful to all shareholders who buy our stock and invest in the company; we see it as our responsibility to protect that equity.

As Gerard noted, the Hidden Gem and the modifications are the most important element. While the capacity potential for the Hidden Gem, the Project Zero offshore system, could be increasing by 130%, you'd expect there should be some efficiencies there. You're not going to see the CapEx increase by anywhere like that. This is something where a lot of the modifications that were going to be made were part of our initial plan, such as a wider diameter riser pipe and a more powerful compressor spread. This is taking those plans and effectively taking the next step, and then adding another collector vehicle. Of course, there's going to be investment on the offloading system as well. This is something where, as we get more information and chat through with Allseas over the coming months, we'll provide a bit more specificity. It shouldn't be something where you can expect a linear relationship between the increase in capacity and the increase in associated CapEx. We've been developing this system and project, and having a partner like Allseas willing to put their balance sheet up to get these modifications going has been very helpful as well.

Last question. I know these are all timeline related, which can be a bit annoying. You mentioned the promising information coming out of the environmental impact study, is that something we should expect to get information on before submission to the ISA? Or is that something to look for in the middle of next summer?

No, you can expect to see a steady stream of that information becoming available. There's also a lot of collaboration with other contractors as well because while they haven't been moving at our pace, they have a rich history. Some of those contractors have had their ground since 2001. They actually have a lot of historical data and have been back to their area recently in some cases. I think that's going to build a better picture of that ecosystem. It will give people a lot more confidence in how we can minimize impacts, and they will be minimized. So expect a steady stream of those reports coming out.

There are no further questions at this time on the phone. I'd like to turn the call back over to Gerard Barron.

There are a few questions in the queue. But anybody whose question wasn't answered, please reach out to [email protected], and we'll try to answer as many as possible. But, Gerard, back over to you.

Thanks, Craig. I would like to reflect on just some of the key derisking milestones we've seen over the last few quarters. In the fourth quarter of 2022, Allseas and NORI announced major offshore collection achievements, lifting over 3,000 tons of nodules to the surface, proving the technology for collecting nodules works. In the first quarter of this year, we announced a strategic initiative with PAMCO to potentially process nodules at a facility requiring minimal modifications and no CapEx to TMC, and also announced additional flexibility on the financing front, including the $25 million unsecured credit facility provided by our partner Allseas. The support from our key shareholders has only increased, as demonstrated by today's capital raise. Now, we're seeing great progress on the last piece of the puzzle: the finalization of the mining code by the ISA. As that important work continues, our team will work tirelessly to deliver the best possible application, including what I know will be a world-class, peer-reviewed assessment of the environmental and social impacts of the first project in our portfolio, providing confidence to the world that nodules can be responsibly collected and processed into the key metals needed for the energy transition of our planet. I’d like to extend my sincerest thanks to my team, our small army of highly skilled partners and contractors, and, of course, to our sponsoring states of Nauru, the Kingdom of Tonga, and Kiribati. Thanks to everyone who tuned in for your interest, attention, and support. With that, I'd like to wish you all a pleasant rest of your day.

Thank you for your participation. This does conclude the program. You may now disconnect.