TMC the metals Co Inc. (TMC) Q4 2023 Earnings Call Transcript

Good afternoon, everyone, and thank you for participating in the metals company's Fourth Quarter and Full Year 2023 Corporate Update Conference Call. Joining us today are the metals company's Chairman and Chief Executive Officer, Gerard Barron, and Chief Financial Officer, Craig Shesky. Following their remarks, we will open the call for your questions. Before we go further, I would like to turn the call over to CFO, Craig Shesky as he reads 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 very much. Please note that during the call, certain statements may be made which 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. 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 statements. Our remarks today may also include non-GAAP financial measures, including with respect to free cash flows, and 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, and you're welcome to follow along with our slide deck, or if joining by phone, you can access it anytime at investors.metals.co. I'll now turn the call over to our Chairman and CEO, Gerard Barron. Gerard, please go ahead.

Thanks, Craig, and thanks to all of you for joining us today for our fourth quarter 2023 corporate update call. Firstly, I'd like to mention the great piece that ran last night on 60 Minutes regarding seafloor nodules and the United States' position on the Law of the Sea and reflect a bit on just how far we've come. Just over four years ago, we hosted Bill Whitaker and the 60 Minutes team on board the launch of a vessel to provide what was, for many people, their first glimpse of this impending new industry. In fact, some of our team members and key investors have cited that piece as what originally put nodules and our company on their radar. I'm amazed at just how much our team has accomplished in the four years since that original piece. In 2021, in advance of our transaction to go public, we put out two SEC-compliant resource statements and an initial assessment on the NORI-D contract area signed off by AMC consultants, with a net present value at the time of $6.8 billion. In 2022, we completed the first successful integrated pilot system test in the CCZ since the 1970s, lifting 3,000 wet tons of nodules and helping to derisk our future offshore operations alongside our partner Allseas in late 2021. We also completed our pyrometallurgical processing pilot, derisking our flow sheet in advance of future onshore operations. We've signed a binding MoU with PAMCO in Japan to initially process nodules at their existing RKEF facility, and we're pleased to announce today that we successfully derived the first-ever nickel sulfate from seafloor nodules, but more on that in a bit. Finally, we wrapped up the last of our 22 pre-production offshore campaigns, including the completion in late February of our environmental campaign, one year following our pilot collection test. Our team is very encouraged by the initial results. Last night, Bill Whitaker and his 60 Minutes team revisited their original story, focusing on recent actions by US political, military, and intelligence communities to catch up to China in this space. At the same time, the rest of the media seems to have caught up with the importance of this topic, with major new pieces this month from The Wall Street Journal and the Financial Times, BBC, Politico, and many others. The takeaway to me is clear: the time is now for this resource, and as the most advanced contractor with a multi-year head start, TMC is well-positioned to leverage this increasingly favorable geopolitical landscape. Moving on to our current liquidity picture, I'm pleased to announce that along with ERAS Capital, the family office of our Director and largest shareholder Andrei Karkar, we have agreed to provide a $20 million unsecured credit facility with a maturity date in 18 months, and the interest rate on this unsecured facility is the six-month secured overnight funding rate plus 4%. Furthermore, our partner, Allseas, has also agreed to extend their existing credit facility for a further period until August 2025. The ATM program, the extended Allseas unsecured credit facility, and the new credit facility provided by ERAS and myself all remain untapped today. With existing cash at year-end, plus the $9 million in additional registered direct offering funds from ERAS Capital received in January, our pro forma year-ending liquidity stands at $61 million. As we've said previously, our preferred form of financing moving forward will be at the asset level, and we are making good progress with several parties there. You can certainly expect to hear more about this very soon, as we've witnessed an uptick this year in both the number and quality of inbound financing offers from institutions, including underwritten equity transactions and convertible note offers. Even with a rising share price, we'd much rather fund the project through other, less dilutive means, as evidenced by today's credit facility announcements. This means that TMC now has sources of unsecured funding from each of its three largest shareholders. We care deeply about minimizing dilution, and I hope this action speaks to our confidence in where things are headed with respect to potential strategic partners. The next slide provides an overview of our Q4 results and recent business developments since our last quarterly update. I won't read all of this detail to you, but I did want to flag an update to our expected first commercial production on NORI-D. We now expect to commence production offshore at the end of the first quarter of 2026, assuming an ISA review process of approximately one year from the submission of our application for an exploitation contract, which is still expected following the July 2024 ISA session. Alongside our partner Allseas, we've refined our assumptions to hit the ground running with a larger potential production system on the Hidden Gem vessel, upgraded from the initial target of 1.3 million tons annually to the new maximum annual production capacity of 3 million wet tons, which reflects an increase of 130%. This also reflects some revisions to the ISA application review timeline in the latest consolidated draft text. We never like any delays to our production timelines, but we want to make sure that we get everything right the first time and avoid a situation where production has to slow down for further modifications after we've begun. On the agenda today, we'll take you through the following items: a brief reminder of TMC's value proposition, a review of some important industry headlines, an update on the progress of our NORI-D project, a snapshot of the environmental case for TMC and nodule collection more broadly, a regulatory update on this month's ISA meeting, and finally, our financial update. But first, let’s consider first principles. Why look to the seafloor nodules in the first place? Well, for starters, the abyssal plain represents an area of the planet with the least life, the lowest biomass per square meter, second only to polar regions. The world has woken up to the fact that we need to shift away from fossil fuels, and the current challenges of sourcing metals from the land are gaining increased attention. Nodules offer real, tangible advantages over their terrestrial equivalents as they contain high grades of four metals in one ore. Sourcing battery metals from nodules requires no digging or blasting and produces near-zero solid waste. Far offshore, we also don't have to displace human communities, nor build the costly fixed infrastructure necessary to access mineral resources on land. When you put all that together, it is clear that nodules hold significant potential to dramatically reduce the human and planetary costs of sourcing metals. This resource is also remarkable for the direct correlation between its mineral composition and that of electric vehicle battery cathodes and wiring. Rich in nickel, copper, cobalt, and manganese, these nodules closely fit the requirements for the majority of the EV battery cathodes being sold today. Additionally, our resource is an outlier among the world's nickel projects, as NORI and TOML are ranked by mining.com as the largest two undeveloped nickel projects in the world. The nickel equivalent grade of this resource truly stands apart. The nickel market has been reeling over the last year due to an influx of lower-cost supply from underneath Indonesian rainforests. BHP recently estimated that 50% of the nickel cost curve was loss-making at current nickel prices on an all-in sustaining cost basis. With a nickel equivalent grade of over 3% and four key metals in one resource, TMC is able to withstand commodity price volatility better than most and provide an economically viable counterweight to the portion of the nickel market controlled and funded by China or Russia. It’s fair to say that the eyes of the world are watching this new industry, with major media outlets and leading think tanks acknowledging that commercial operations will soon be a reality. In a new analysis by the influential Breakthrough Institute, Oceanographer and Co-Director of Climate and Energy, Seaver Wang found that sourcing key metals like nickel and copper from nodules could deliver far lower impacts than sourcing them on land, despite much exaggerated claims to the contrary. In a recent interview with CNBC, ISA Secretary-General, Michael Lodge, noted that growing interest in marine minerals by countries like China, India, and Norway means that commercial operations now appear inevitable. This lines up with the takeaway last year from the New York Times reporter Eric Lipton, indicating that this industry is now a question of when rather than if, and when is coming even sooner. The nodule resource is also gaining support in Washington, DC. Over the last two years, congressional members have made repeated calls to action to the Defense and Energy Departments to start planning for the development of processing and refining capabilities for deep-sea nodules. Recently, the introduction of the Responsible Use of Seafloor Resources Act and the signing into law of the National Defense Authorization Act by President Biden tasked the Pentagon with formulating a report assessing how the US might process nodules domestically. The report will outline controlling parties of deep-sea resources, America's current production and processing capabilities, and a roadmap laying out recommendations for how the US can leverage its domestic expertise to process nodules and play a leading role in the industry. This underscores the massive long-term potential that we represent for the United States, which could transition from near-total import dependence for nickel, cobalt, and manganese to metal independence in all three, just from our contract areas alone. However, this does not change our capital-light plan to begin production at existing RKEF facilities such as PAMCO in Japan. I'd now like to turn it over to Craig to discuss the progress of our NORI-D project.

Thanks, Gerard. We are excited to announce that in November of last year, we signed a binding Memorandum of Understanding with PAMCO to process the first nodules when commercial production is set to start in 2026. PAMCO plans to have a commercial-size pilot in the second quarter of 2024, processing 2,000 tons of nodules collected during NORI's mining test through their existing RKEF facility. Additionally, we've shown that we can convert nodules into nickel sulfate, indicating their suitability for the battery market, pending confirmation from preliminary assays. This sulfate was produced during a program that assessed our efficient design for processing nickel matte directly to nickel sulfate while generating fertilizer byproducts instead of waste. It's worth noting that producing nickel sulfate could significantly reduce the carbon footprint compared to all other nickel processing methods analyzed in last year's lifecycle assessment. As discussed in our last call, we are allocating most of our resources towards our environmental impact statement and pre-feasibility studies. Collaborating with Allseas, we've made several iterations in mine planning and design for the Project Zero nodule collection and transport system. PAMCO has conducted extensive work in Japan and confirmed that seafloor nodules can be processed at their current facility to create intermediate products that meet our specifications. Anticipated purchasing agreements with Allseas and PAMCO will be crucial for the modeling work in our pre-feasibility study, which will include estimates for capital and operational expenditures, expected to be finalized later this year. Over the last 12 years, we have carried out 22 offshore campaigns to establish an environmental baseline throughout various water depths to test our pilot collection system and assess the impacts of test mining. This large-scale research initiative is unprecedented in deep ocean studies, providing regulators and the public with essential data for informed decision-making. Now that our latest offshore campaign is complete, we have improved insights into the actual impacts of nodule collection, contrasting sharply with past conjectures that lacked empirical backing. The reality is vastly different. Our team is dedicated to finalizing our environmental impact statement, which is crucial for our application for an exploitation contract. The EIS requires us to publish peer-reviewed research papers, based on the hundreds of terabytes of data collected before, during, and after our pilot test collections. These papers are in preparation, and we look forward to sharing our findings in peer-reviewed journals in the upcoming months to support our application to the International Seabed Authority. The collector system test last year marked a pivotal moment in the development of this industry, with over 3,000 tons of nodules collected, providing us with real-time impact observations and generating extensive infield data. This dataset is the most comprehensive ever collected in the Clarion Clipperton Zone and is generating excitement among researchers who appreciate the rigor and scale of our scientific program. The data is also available in public databases, including the ISA's deep data library and other open-source repositories like UNESCO's Ocean Biodiversity Information System. Moving on to the post-collection monitoring campaign, our team member Katie Allen will now highlight some key aspects of the research conducted late last year. We will now play a video. In the next slide, you'll see images taken immediately after the collection test compared to those taken one year later. Our qualitative data shows that individual organisms were present and alive one year after the collection test, even near the vehicle tracks. While this information is preliminary and anecdotal, it is one reason our team feels optimistic about the early monitoring results. During the collection test, we effectively tracked the plume using various tools in the water. The image illustrates the midwater plume, which would be too dilute to see with the naked eye. The seafloor, or benthic, plume is also minimally represented in the graphic. Experts in deep-sea sediment plume dynamics found that 92% to 98% of sediment disturbed during offshore trials stayed within 2 meters of the seafloor. Preliminary findings from top experts at DHI support this conclusion. Our team established over 50 monitoring stations to track every aspect of the plume during noise collector trials last year. Data reveals that the sediment plume is low-lying, with more than 90% remaining less than 2 meters above the seafloor, forming a turbidity current that behaves more like a liquid than a gas. Much of this current would be clear enough to swim in, and some would even be drinkable. This clearly contradicts the speculation from opposing groups. Evidence from observed data should take priority over such unfounded claims. This may explain why Greenpeace has shifted from advocating for more scientific research to attempting to halt our own scientific initiatives. They have not been successful; our key offshore campaigns have concluded ahead of our application, and they cannot impede the continuous flow of data we share, including with the International Seabed Authority. We have been pleased with the advancements at the latest ISA meeting held in Jamaica, highlighted by positive remarks from Secretary General Michael Lodge about the industry's inevitability. Our team is directly engaged in Jamaica, receiving regular updates on the ongoing discussions, which are constructive. In terms of negotiations for the final rules, regulations, and procedures, the consolidated regulatory text was released in late February, marking the shift to final Mining Code negotiations. We maintain our prior guidance on our intent to submit our application for an exploitation contract following the July 2024 ISA meeting, with production anticipated to begin by the end of Q1 2026. We will submit our application for the exploitation contract after the July 2024 ISA session, expecting a one-year review process. I would like to reiterate key aspects of this slide. People often view the regulatory process as a mystery, but it is actually clear and outlined. A significant decision regarding our application will come from the Legal and Technical Commission, which comprises subject matter experts who will evaluate the application. If consensus for approval is not reached, a decision will be made by a simple majority vote. Should the LTC recommend approval, the council will then review and endorse that recommendation. We anticipate substantial discussions and inquiries from the LTC but are hopeful about the merits of our application. Concerning project economics, as noted in previous updates, AMC Consultants provided an SEC Reg S-K 1300 compliant initial assessment of the project economics in the NORI-D area, available on our website. This initial assessment indicated a net present value of $6.8 billion for NORI-D at the beginning of last year. With current metal prices, the net present value is now approximately $8.1 billion. Despite our higher share price now compared to the previous report, we are still trading at roughly 6% of the underlying NPV for the NORI-D area, suggesting a considerable discount compared to peer developers, thus highlighting our potential for valuation improvement as we achieve project milestones. Now, I will update you on the financials. In Q4 of 2023, TMC reported a net loss of $33.4 million, or $0.10 per share, compared to a net loss of $109.5 million, or $0.41 per share for the same quarter of 2022. This included exploration and evaluation expenses of $26.7 million versus $104.3 million in Q4 2022, with general and administrative expenses standing at $6.5 million compared to $7 million in Q4 2022. The significant decline primarily reflects the recognition of costs linked to the fair value of the Allseas warrant in Q4 2022, along with the completion of the pilot mining test during that period and reduced environmental study costs after the collection test, offset by monitoring work on NORI-D conducted in Q4 2023. Furthermore, general and administrative expenses decreased slightly by $0.5 million in Q4 2023 compared to the previous year. The most considerable change between Q4 2023 and the same quarter in 2022 results from fluctuations in the fair value of the warrants liability relative to the company's share price. Cash utilized for operating activities amounted to $15.2 million versus $19.8 million in Q4 2022. The significant difference between the net loss for Q4 2023 and cash used in operating activities reflects changes in working capital, including increases in accounts payable and accrued liabilities. Free cash flow was negative $15.6 million compared to negative $20 million in Q4 2022. We concluded the year with a cash balance of $6.8 million and no debt. Our cash reserves, along with the undrawn $25 million unsecured credit facility available until August 2025 with an affiliate of Allseas and the new $20 million unsecured credit facility, will sufficiently cover our working capital and capital expenditure needs for at least the next 12 months. The right of use asset, which is a new item on our balance sheet, stood at $5.7 million as of December 31, 2023, representing the net carrying value of the exclusive right to use the Hidden Gem for developing the Project Zero offshore nodule collection system. In exchange for this exclusivity, we issued 4.15 million common shares to Allseas in August 2023. On February 21, 2023, NORI entered into an investment agreement focused on financing low-carbon emitting energy production and technologies for the energy transition. This investment amounts to $8.4 million, representing the company's stake in low-carbon royalties, net of equity accounted loss for the year. We will treat a 2% gross overriding royalty on its future revenue as a right, with the option to repurchase three-quarters of that royalty over time at a substantially discounted price, considering the project's current stage. As we finalize the 2023 year-end financial statements and based on new insights from our auditors' technical team, we have reassessed the accounting for this transaction and restated the proceeds from low-carbon royalties as a royalty liability. This is a non-core, non-cash matter, and the effects of this restatement are explained in Note 22 of our annual report on Form 10-K. I will now hand it back to Gerard for some closing comments, after which we will open the floor to questions and answers.

Thank you, Craig. As I mentioned at the beginning, the time is now for this new industry. With our own research vessel back in port and significant offshore pre-production spending now behind us, our team's focus shifts to analyzing the vast amounts of environmental data we've collected and preparing our application for an exploitation contract for the NORI area, which we expect to submit following the July 2024 ISA session. After processing initial results from our latest environmental campaign, I'm confident there are no showstoppers, and we look forward to releasing all this data to stakeholders globally. In the meantime, our executive team will continue the work of securing strategic partnerships, and I will dedicate much of my time to this effort in the coming weeks. I would like to extend my sincere appreciation to the TMC team, our partners, contractors, and sponsoring states, as well as to everyone who has tuned in to our call today. Thank you for your attention. I would like to hand it back to the operator for Q&A.

In the meantime, our executive team will continue the work of securing strategic partnerships, and I will dedicate much of my time to this effort in the coming weeks. I would like to extend my sincere appreciation to the TMC team, our partners, contractors, and sponsoring states, as well as to everyone who has tuned in to our call today. Thank you for your attention. I would like to hand it back to the operator for Q&A.

As we are waiting for that to compile, we will start with a question from the web chat. Milo Amundsen has asked, is the 6% of share price on NORI assets or all assets? What percentage is it of all assets? It's a good question. We've always laid out what the valuation is based on NORI-D, which is our most advanced project, on which we are spending close to $500 million already to bring it to where it is now. NORI-D represents roughly 22% of the total estimated resource across NORI and TOML. We estimated when we went public that the full field net present value from NORI-D is $31 billion. However, we focus on the $6.8 billion calculated by AMC consultants in the NORI-D initial assessment as a valuation guidepost. Our market cap represents roughly 6% of the updated value of that NORI-D initial assessment at current metal prices, around $8 billion. To answer your question, it's focused mostly on NORI-D, recognizing that there's significant upside from the other 78% of our total estimated resource.

Good afternoon. Thank you for taking my call. Could you provide more detail on the factors that led to the modest extension of the time to offshore production into the first quarter of 2026, compared to the original date, which I believe was the fourth quarter of 2025?

Hi, Dmitry. The driving reason is moving the production number of that boat from 1.3 million tons to 3 million tons. It was a necessary decision, but it improves the economics significantly. However, it requires an upgrade, including some modifications for material handling and a slightly different riser configuration, all managed by Allseas. That's what resulted in this later timeframe.

Understood. Following up on the March meetings with ISA, what would you interpret as good news versus a disappointing outcome?

This is the first time a consolidated text has been presented, making this a crucial milestone. We seek continued progress, and it's been a productive week. Bad news? We haven't seen any so far. While there’s typical noise around this time, it differs fundamentally from reality of what's occurring. There are 168 members earnestly working to regulate this industry, which everyone agrees is the best way to protect the ocean environment. We expect to see more progress as we move toward notable regulations.

Got it. Thank you. Finally, regarding liquidity, what is your view of your current position? How urgently do you need to find a strategic partner in 2024?

Sorry, Gerard, I can respond first. We believe that our cash on hand plus credit facilities, totaling $45 million, will meet working capital and CapEx needs for at least the next 12 months. The last estimate we provided was $35 million to $45 million of additional cash needed for launching our application. We continue getting many financing proposals, particularly from our three largest shareholders who are committed to minimizing dilution. Over 50% of TMC shares are held by insiders or affiliates, underscoring the desire to do the right deal. The confidence shown by the extension of the Allseas credit facility and new credit facility from Gerard and Andrei show optimism for these potential options.

Thank you.

The simplest approach is equity printing, but we care about our equity stack which is vital for our shareholders and employees. We have direct insight into how negotiations with interested parties are going. This is the right course for all shareholders.

Thanks for taking my question. Can you touch on the timing and scope of the upcoming feasibility study? Is it still on track for mid-year, and how will this differ from the previous one?

Sure. It’s expected to be completed by mid-year. As we transition from pre-feasibility to feasibility, we will tighten the cost scope and budget certainty. We already have our first production asset, the Hidden Gem, owned by Allseas. We are collaborating with our onshore partner, PAMCO, who has an existing purpose-built nickel processing facility. The pre-feasibility study will address many technical issues and support our application.

Thanks. Will the upcoming study provide insights on payments to PAMCO and Allseas for nodules processing?

Absolutely.

Thank you for the questions. As we transition back to the phone, let’s take a question from Vasu Patel from Patel Holdings LLC.

What are the estimated costs associated with the ISA application, and will they be covered by current cash assets or credit facilities?

The application fee is roughly in the ballpark of a million dollars, but the larger cost comes from the extensive analysis and collating data into a document that will be many hundreds of pages long. We've already finished our offshore campaign following one year from the collection test, with much of the information now being analyzed for the environmental impact statement and pre-feasibility study. The $35 million to $45 million of incremental funding does not include tapping into our credit facilities, which we feel confident about regarding liquidity options. We are committed to moving forward.

Looking at future mining post-2026, with currently one vessel in use, how will production ramp up once the application for exploitation is approved?

Great question. We know our nodules can be processed through rotary kiln electric furnaces, and many of these facilities exist in China, Japan, and recently Indonesia. This means we do not need to invest in building new processing plants for the first phase. Processing will involve both pyrometallurgical and hydrometallurgical processes. US policymakers are noting the potential to import our intermediate products into the US for battery production, establishing a domestic supply cycle. We're also looking to secure a second production vessel, and we have interest from parties wanting to collaborate on potential ventures, making it a cookie-cutter approach for early expansions. Costs will be driven down with increased production capacity in the future.

Thank you.

We will move from the phone line to some chat questions. Gerard, there's a question regarding China's influence on deep-sea mining and the recent five-year agreement between Russia and the ISA. Could you address what you observe regarding China in these discussions?

Certainly. China is the most powerful voice at the ISA. Their position has solidified partly due to the absence of the US. They want all member states to adhere to the legal obligations established by the Law of the Sea regarding deep-sea exploration and exploitation. It's noted that China already holds five contracts in our operating region. They want regulations to safeguard the environment, and we support such initiatives. The establishment of a regulatory framework led by 168 member countries plus the EU opens pathways for both effective oversight and industry development.

We have a question regarding DPA Title III grants from the Department of Defense. We are closely monitoring the DoD grant program, which had around $400 million allocated to it earlier this year. Stay tuned for updates. The timelines may stretch longer than expected, but the Pentagon's report recommending processing and refining of nodules will improve our national security significance.

We are regularly contacted by countries, especially developing ones, seeking partnerships to enter this industry. Currently, our focus is on the NORI contract area, but we are exploring how we can assist such nations participate in the industry.

Lastly, do we have updates on discussions with auto OEMs and their interest in this industry?

We continue to engage with auto OEMs, but they will likely wait until we are closer to production. Our role is to maintain communication, update them on the environmental findings, and when the time is right, we will be well-positioned to partner with them. Factors like carbon equalization measures and battery passport initiatives will be tightly monitored going forward.

Thanks to everyone for participating in today's call. We look forward to sharing more progress on our next quarterly call coming soon. Now we'll turn it back to the operator.

Thank you, sir. This concludes today's conference call. Thank you all for participating. You may all disconnect.