TMC the metals company Inc. (NASDAQ:TMC) Q1 2023 Earnings Call Transcript May 11, 2023

Operator: Good day and thank you for standing by. Welcome to The Metals Company First 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. [Operator Instructions] Please be advised today’s conference is being recorded. I would now like to hand the call over to your speaker, The Metals Company CFO, Craig Shesky. Please proceed.

Craig Shesky: Thank you very much. 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 maybe 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 first 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 upcoming 10-Q for the quarter ended March 31st, 2023.

I will then 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 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 can be found on our slide deck. And the slide deck is available on our website at investors.metals.co. And now, I’d like to turn it over to our Chairman and CEO, Gerry Barron. Gerry, please go ahead.

Gerry Barron: Thank you. Thank you, Craig and good afternoon and thank you all for joining us today for our first quarter 2023 corporate update call. You are welcome to follow along with our slide deck or if you’re joining us by phone, you can access it all any time at investors.metals.co. It’s only been about six weeks since our last update call, but the first quarter has set an exciting turn for 2023, with progress at the International Seabed Authority generating headlines around the world, but we’ll cover more on that later. I’d like to highlight some important financial milestones that occurred during the quarter. Since going public, we’ve been enhancing our system of controls and procedures now culminating with the removal of our material weakness from 2021 and with the certification filed by myself and our CFO at the end of 2022, as required under Sarbanes-Oxley Act.

I’d like to thank our entire finance team, including our Chief Accounting Officer, Claude Plourde, for leading our continuous progress as a public company with mature internal controls. We ended Q1 with over $28 million in cash and also announced in March a new $25 million unsecured credit facility with an affiliate of Allseas. This facility remains untapped today as does our $30 million at the market equity program. We also announced a strategic partnership with Low Carbon Royalties in February in which we contributed a 2% gross overriding royalty on NORI in exchange for $5 million and a 35% equity stake in LCR and a right to repurchase up to 75% of the royalty at a fixed return. We mentioned on our last call that LCR has the potential to be an additional source of capital to bring NORI-D and other TMC projects into production, and we believe LCR management continues to show signs of that potential.

In March 2023, LCR acquired additional royalties on NG Energy’s natural gas fields in Latin America, effectively doubling its total royalty on the Maria Conchita block to 3.1% and adding a 1.4% gross overriding royalty on the SINU-9 block, indicating an upward trend in the valuation of this partnership. We’re excited about LCR’s pipeline of other Potential Royalty Acquisitions as well. LCRs corporate presentation, sites of pipeline of term sheets and opportunities with over $200 million of net asset value in their estimation, and please head to lowcarbonroyalties.com for more information. So on to the agenda. Today, we’ll take you through the following items: a summary of recent regulatory news, a brief market update, a reminder of TMC’s value proposition and an update on the progress of our NORI-D project and some more ESG information and of course, our financial update.

At the March 2023 ISA session, Member States made significant progress on key aspects of the regulatory text and reiterated their commitment to adopting final rules, regulations and procedures. I would like to thank the 167 member states and the European Union for their tremendous efforts, both at these formal sessions and the intersection of work that is happening in between. It is important to note, that all member states are working diligently with the ISA Secretaries and observers to get this innovative regulatory regime in place. And this even includes the small minority of member states, calling for a precautionary pause or a moratorium represented in yellow on this page. Fortunately, this industry is guided by the United Nations Convention on the Law of the Sea, and there is no wiggle room to follow certain parts of the convention while ignoring others.

As Italy’s Minister of the Environment and Energy put it last week, UNCLOS contains an obligation to negotiate the regulations, and there is no legal basis for a moratorium or precautionary pause. Major news coverage on the ISA progress has also picked up. Though the reporting has approached the issue from various angles, there is increasing acknowledgment that this is not a question of if this new industry starts, but when, as tweeted, following the conclusion of the session by the New York Times reporter, Eric Lipton. And on the next slide, we’ll lay out what we think, were some of the major takeaways from the March ISA session. Firstly, all states reiterated their commitment to the adoption of the rules, regulations and procedures known as The Mining Code.

Further, we were pleased to see significant progress made by member states on many aspects of The Mining Code. Regarding applications, submitted before a, final mining codes in place, the ISA confirmed that the Legal and Technical Commission or the LTC shall review an application and provide a recommendation to the council. And the council confirmed it has the obligation to consider a plan of work for exploitation after July 2023. Of course, we would much prefer to start my operations with an exploitation contract granted under, the final mining code. However, we reserve our legal rights under UNCLOS to lodge an exploitation application before the mining code is adopted. But we look forward to continued progress at the upcoming July meeting, and through the ongoing intersectional work.

Together with the Republic of Nauru, NORI commits to only submitting an application for a commercial contract after we complete a high-quality comprehensive and science-driven environmental and social impact assessment or an ESIA. Last quarter, we discussed some of the developments on this page with increased interest in seafloor resources, the countries and companies with industrial credibility including Transocean’s announcement of providing a Samsung 10,000 drillship for conversion into a nodule production vessel ahead of Belgian contracted GSR’s integrated system test, currently scheduled for 2025. I spent time last week in Houston at the Offshore Technology Conference, and it was amazing to see all of the interest in seafloor resources from major offshore players, several of whom have publicly announced their intention to invest in this space.

And while interest continues to grow and the potential for seabed minerals to reduce the West reliance upon China, China itself is accelerating its efforts in this space. In March, the state newspaper, China Daily reported that the world’s largest battery metals producer was stepping up its investment in the development of nodule collection systems. And the Chinese official interviewed in the article noted TMC’s leadership position in the industry. China currently holds three exploration licenses for polymetallic nodules. And in February, China Ocean Mineral Resources, Research and Development Association, or COMRA, as we know them, signed a second contract extension for polymetallic nodule exploration, granted on the basis that it will be in a position to proceed to exploitation within five years.

On to our value proposition, the scale of our nodule resource is enormous. Each little car on this page represent the metal required to electrify one million vehicles with a 75 kilowatt hour battery based on NMC 811 chemistries. 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. Earlier this month, mining.com released their updated 2023 rankings of the world’s largest undeveloped nickel projects. And there was some reshuffling within the 10 largest nickel projects, but the top two remain the same again this year. TMC’s NORI at number one, and TMC’s TOML at number two. And you’ll notice several Canadian projects in the mix, and this is where focusing on nickel equivalent grades is so important compared on the bottom of this page.

And on land, for both nickel and copper, grades have declined over time, which is significant for several reasons. It means more ore has moved to get the same amount of metal and it often negatively impacts the economics for producers requiring higher prices to greenlight new projects. And it requires more land use, more energy use and more water use. And when you couple falling grades with sharply rising demand for clean energy technologies and metals, it becomes an exponential increase in tailings and solid waste. NORI-D nodules have a nickel equivalent grade of 3.2%, with four key metals in the one resource. And this grade differential between TMC’s projects and the world’s other undeveloped nickel projects is highlighted on the Y axis [Audio Gap]– TMC is an outlier among peers with the largest nickel equivalent resource and the highest nickel equivalent grade.

And this grade differential is the key attribute, which affects our future estimated margins, our net present value and which allows for the potential compression of environmental impacts per ton of metal, as highlighted in the recent benchmark life cycle analysis comparing nodules to conventional land-based resources. Under our to our NORI-D project, starting with an explanation of what the project entails. While the exploitation application to the ISA is focused on offshore nodule collection, the NORI-D project, the first in our portfolio, representing 22% of our total estimated resource is actually a fully integrated project from seafloor to the factory gate. And on this project, we’ve spent in excess of $300 million over the last decade.

At a time when the reshoring of energy transition metal supply chains is taking center stage, we’re seeing significant interest from multiple parties and across the logistics and bulk transport sector to see this coming industry as a means to support their growth ambitions in the coming decade. And additionally, our lab and bench scale onshore processing work over the past several years has been very successful in showing that nodules can be turned into these critical metal products. Zooming in on that onshore component of NORI-D, we’ve made some deliberate choices in the design of our flow sheet with the help of our industry-leading partner, Hatch. And this flow sheet would produce near zero solid waste using almost all of the nodules massed while producing zero tailings.

So how is this possible? Well, this slide summarizes the progression of material through the flow sheet. With the pyrometallurgical stages successfully demonstrated on a pilot level in 2021. And First is the calcine step, where nodules are heated to remove water from the hydroxide minerals. Next, the calcine is smelted, which produces a metal alloy rich in nickel, copper and cobalt and the manganese silica products. So with relatively straightforward scope, the alloy can be upgraded to matte, which is a conventional intermediate product with concentrated nickel, copper and cobalt. And since the matte is conventional, the refining of matte to battery grade sulfate products is also conventional. If we so choose, we can sell the matte to existing refineries to reduce the battery metals on the right side of this page.

And near zero waste and no tailings is possible because of the manganese silica product contains most of the mass of the nodules. So there just isn’t a lot left over. A byproduct aggregate, fair like [ph], slag material is produced with the remaining nonsalable portions. And the nodules also contain naturally lower levels of certain toxic elements which often require more difficult waste and tailings management on land. Fair like lag is used commonly as road aggregate or other products all around the world today. The nickel copper cobalt alloy and the manganese silica products are the first possible saleable materials. And this is our initial plan with specific metals of Japan or PAMCO. In March, we announced that we had signed a nonbinding MOU with PAMCO to evaluate the tolling of 1.3 million wet tonnes or more of polymetallic nodules per annum at their smelting facility in Japan, starting in 2025.

Using a 22-tonne sample of the nodules collected during last year’s test, PAMCO have made great strides in their evaluation of the cost of processing nodules, using their existing facilities and of any additional equipment requirements, which are currently expected to be minimal. Working with PAMCO can help us achieve our stated capital-light strategy to get into initial commercial production, potentially reducing both our time to market and our upfront costs. We were pleased to report in the fourth quarter that Allseas and NORI achieved all significant pilot collection system milestones while collecting approximately 4,500 tons of seafloor polymetallic nodules and over 3,000 tonnes were lifted up, the 4.3 kilometer riser system to the Hidden Gem vessel.

And as historic as it was to see those first nodules up the pipe, perhaps the most important takeaway from these trials was a wealth of data gathered on the environmental impacts of nodule collection. Let me share some more detailed information of — on the important work done by our partners during the Environmental Impact Monitoring Campaign, which is part of our $100 million environmental and social impact assessment. We’ve engaged some of the world’s leading research institutions and companies as part of our ESIA program. In 2022, we collected over 200 terabytes of data alone. In March, we announced that NORI had begun submitting data, collected during 17 offshore resource definition and environmental campaigns to the ISA’s deep data platform.

The first submission of benthic data, which includes over 270,000 occurrences, will provide a significant expansion to the biological holdings contained within the DeepData platform. And once fully collated and categorized, we expect that the deepsea data set for the NORI-D area alone to be the most extensive catalog of its kind on the planet, which will be available to all of society. I’d like to play a short video, highlighting some of the biological sampling work done during the Environmental Impact Monitoring Campaign. [Video Presentation] Of course, it’s the infield data gathered by contractors like NORI and others, that is forming a fuller picture of the environmental impacts and mitigation measures that we can expect in this area of the abyssal plain.

And this is particularly true with regard to settlement plumes, which have previously been the topic of much hyperbole and speculation. Leading experts in the field of deep sea settlement plume dynamics, including a team led by Professor Tom Peacock at MIT as well as researchers at Scripps, found that 92% to 98% of sediment disturbed during the offshore system trials conducted by fellow contracted GSR remained within two meters of the sea floor. And as they note in the conclusion to their study, it’s quite a different picture of what these plumes look like compared to some of the conjecture. And on our own ground, in the NORI-D area, preliminary research conducted by leading experts at DHI as part of our own collection system test last year, supports the findings of MIT.

And here’s a glimpse of this work in this short video. [Video Presentation] So, recently, we released the results of a comparative lifecycle assessment done by Benchmark on the NORI-D project and key land-based routes for getting nickel, cobalt, and copper. And for nickel, the NORI-D project outperforms all terrestrial routes and all impact categories assessed, including global warming potential, water consumption and, waste generation. I’d encourage you to read an extensive piece just released by the Washington Post last night to get a better picture of the environmental and human impacts of rain forest nickel. This slide provides a visual comparison of nickel from the NORI-D as compared to nickel from Indonesian laterites processed via RKEF and [indiscernible].

The impacts for NORI-D are probably hard to see on your screen, represented by a tiny blue line. And even when compared to other forms of nickel supply in the bottom table, nickel from NORI-D nodules, again, produces the lowest impacts versus all compared conventional sources for every impact category measured. Soon, we will be releasing the next part of benchmarks assessment, which quantifies the additional carbon impacts from land-based mining associated with the loss of carbon sinks and the sequestration services they provide. To preview those results, the gap between nodules and conventional sources is even greater when sequested carbon and carbon sinks are considered. And while carbon is immediately released into the atmosphere when Woodland forests are churned up in the DRC or rain forests are removed in Indonesia, there is no known mechanism for disturbed seafloor carbon to get anywhere close to the ocean surface or atmosphere.

One of the most remarkable yet overlooked opportunities around sourcing these metals from the CCZ is the fact that there is — it’s far offshore and away from any human communities. And that means the key social challenges that terrestrial mining faces such as human displacement, child, or forced labor, freshwater usage and exposure to toxic aliments do not exist when collecting nodules. And further, class created a mechanism to ensure that developing nations could access and benefit from this resource through the sponsorship of a commercial entity, quoting the former ISA Secretary General [indiscernible] in a speech in to the United Nations in 2011, the original purpose of the parallel system of exploitation was to provide developing states with a practical and realistic means of participating in seabed mining.

And this is exactly what happened in the case of Nauru and Tonga. It goes on to note, however, that this wouldn’t have been possible without sufficient confidence in the regulatory system from the private sector. And with our sponsoring states, we receive access to this incredible resource, and we get to partner with them via local grants, scholarships, and at-sea training. They also already received administrative and LPs and once we are in production, they will get substantial income via collection fees per ton of nodules and corporate taxes, all of which will become a significant part of their country’s GDP. And I’d now like to turn it over to our CFO, Craig Shesky, to discuss valuation and financials.

Craig Shesky: Thanks, Gerry. So we’ll start with the familiar slide. In March 2021, AMC Consultants issued an, SEC REG S-K 1300 Compliant initial Assessments of the project economics for the NORI-D Area. And this initial Assessment, which was a point-in-time analysis, arrived at a net present value of $6.8 billion for NORI-D at the beginning of 2021. Now the NORI’s initial Assessment is available in the Investors section of our website and the NORI-D financial model can be found beginning on page 310 of that document. But to make it easier for modeling purposes, we’ve also added the Excel tables from this initial Assessment as a separate document again, at investors.medals.com. So of course, running the same model is simply updated for current metal prices.

The net present value of NORI-D would be approximately $13 billion on just 22% of our total estimated resource. So let’s talk a little bit about how these underlying project economics can and eventually should translate into valuation. On this slide, you may also look familiar to many of you who were on our second quarter 2022 Corporate Update Call, but it’s actually new. In the previous version from last year, we compared price to fundamental value for land-based copper developers compared to TMC and using an NPV of NORI-D alone, we found that we traded at a discount of roughly 20 times. On this slide, put together with the help of Stifel, looks at land-based nickel developers instead. And again, the story remains the same. NORI-D is trading at a 20 times discount to these nickel peers.

A small amount of that discount might be pinned of course, on the ISA uncertainty, until the final Mining Code is in place, but there’s also significant regulatory uncertainty on land as well and including for some of the names on this page. So if you just come through all the noise and narratives, the resource is the resource. And with TMC, you have an opportunity to invest in the largest nickel resource in the world, and roughly $0.05 on the dollar, compared to what you might pay on average for the same amount of this critical metal from land-based developers. On the next page, lays out some of the critical milestones that we think can lead to major re-ratings in our public valuation and change this undervalued situation, including, of course, continued progress from the ISA, which Gerry discussed at length.

NORI submitting an exploitation application over the NORI-D Area, the ISA Granting, an exploitation contract over NORI-D and of course, the beginning of commercial production shortly thereafter. On to our financial results, TMC reported net income of approximately zero for the quarter ended March 31st, 2023, compared to a net loss of $21.1 million or $0.09 per share for the quarter ended – excuse me — March 31st, 2022. The first quarter 2020 results include a gain of approximately $14 million on the sale of that 2% royalty on the NORI asset to low-carbon royalties. Exploration and evaluation expenses during the quarter ended March 31st, 2023, were $7.2 million, compared to $7.4 million for the quarter ended March 31st, 2022. The General and administrative expenses were $6.2 million for the quarter ended March 31st, 2023, compared to $8.5 million for the quarter ended March 31, 2022.

The lower spending in the first quarter of 2023 reflects lower share-based compensation as options with specific market capitalization best in conditions were fully amortized in 2022. And lower spending on the Pilot Mine Test System as the collector test was completed in November of 2022. Free cash flow for the first quarter of 2023 was negative $23.5 million, compared to negative $15.7 million in the first quarter of 2022, reflecting an operating loss of $13.4 million, pay down of working capital of $12.3 million due to some timing adjustments, partially offset with equity settled expenses of $1.8 million. As of March 31, 2023, TMC held cash of $28.4 million and held no debt. and we believe that our cash on hand and borrowing availability under our recently signed credit facility with an affiliate of Alsea will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months from today.

So I’ll now turn it back over to Gerry some closing remarks before we take Q&A from the audience

Gerry Barron: Thanks, Craig. I’ve said it before, and I’ll say it again, the pieces are falling into place. In the fourth quarter of 2022, whole season NORI announced a major offshore collection achievements lifting over 3,000 tons of modules to the surface, significantly de-risking the technology of nodule collection. In the first quarter of this year, we announced strategic initiatives with PAMCO and Bechtel and also announced additional flexibility on the financing front, including the $25 million unsecured credit facility provided by our partner, royalties. And I continue to be encouraged by the ongoing financing discussions with a host of strategic parties. Now, we’re seeing great signs on the last piece of the jigsaw puzzle, the finalization of the mining code by the ISA.

As that important work continues, our team will continue to work tirelessly to deliver the best possible application, including what I know is going to be a world-class 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 key metals needed to the energy transition of our planet. Thank you for your interest and attention. With that, we’d like to turn it back over to the operator for some questions.

Q&A Session

Q – Dmitry Silversteyn: Good afternoon, gentlemen. Thank you for taking my call. Congratulations on coming up with a breakeven quarter here. I understand, there were some onetime items there, but still good to see you guys controlling your expenses and keeping the company going and accomplishing all these great things you talked about. Let me get into the questions. First of all, the kind of — maybe it’s bookkeeping, but the low carbon steel — I’m sorry, the low carbon royalty, 35% going down to 32%. Did I hear you right you ended up selling that 2% bag to LCR?

Operator: One moment for our next question. Our next question comes from Malcolm McDonald with BAML. Your line is open.

Operator: One moment for our next question. Our next question comes from Frank Jones with Norbury Partners. Your line is open.

Operator: And I’m not showing any further questions on the phone lines.

Gerry Barron: Great. Well, thank you again for taking the time to join us for this conference call. We look forward to sharing even more progress on our second quarter corporate update call in August to The Metals Company team, and our suppliers, and contractors, and Board members, but especially to our team, thank you for an amazing quarter. Thank you for the enormously high level of commitment that you bring to this mission, and we look forward to speaking to all of our shareholders again in August.

Craig Shesky : Thank you all

Operator: Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful day.