TMC the metals company Inc. (NASDAQ:TMC) Q4 2023 Earnings Call Transcript

TMC the metals company Inc. (NASDAQ:TMC) Q4 2023 Earnings Call Transcript March 25, 2024

TMC the metals company Inc. misses on earnings expectations. Reported EPS is $-0.17 EPS, expectations were $-0.16. TMC the metals company Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, everyone, and thank you for participating in the metals company 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.

Craig Shesky: 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 statement. 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 any time at investors.metals.co.

I’ll now turn the call over to our Chairman and CEO, Gerard Barron. Gerard, please go ahead.

Gerard Barron: 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 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. And 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. NORI-D 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. And we completed our pyrometallurgical processing pilot, derisking our flow sheet in advance of future onshore operations. We’ve also now signed a binding MoU with PAMCO in Japan to initially process nodules at their existing RKEF facility, and we’re also pleased to announce today that we successfully derived the first-ever nickel sulfate from seafloor nodules, but more on that in a bit.

See also 20 Biggest Financial Mistakes That Young Adults Make and 16 Countries with the Most Number of Islands.

Q&A Session

And 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. And our team is very encouraged by the initial results. So last night, Bill Whitaker and his 60 Minutes team revisited their original story, focusing on recent actions by US political and 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, which major new pieces just this month from The Wall Street Journal and the Financial Times, BBC, Politico, and many, many others. The takeaway to me is clear. At last, 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 today agreed to provide a $20 million unsecured credit facility with a maturity date in 18 months, and the interest rate on this unsecured facility and the six month — is the six month secured overnight funding rate plus 4%. Further, 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 facility — credit facility provided by ERAS and myself, all remain untapped today. And with existing cash at year-end, plus the $9 million in additional registered direct offering funds from ERAS Capital received in January, pro forma year-ending liquidity is $61 million.

As we have said previously, our preferred form of financing moving forward will be at the asset level, and we are making good progress with a number of parties there. You can certainly expect to hear more about this very soon, and we’ve seen an uptick this year in both number and quality of inbound financing offers from institutions, including underwritten equity transactions and convertible note offers. But 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. And so this now means that TMC has sources of unsecured funding from each of its three largest shareholders. So believe us when we say 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 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, an increase of 130%.

And this also reflects some revisions to the ISA application review timeline in the latest consolidated draft text released. 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. So 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, and 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 let’s start at first, principles.

Why look to the seafloor nodules in the first place? Well, for starters, the abyssal plane represents an area of the planet with the least life, the lowest biomass per square meter, second only to polarize. And 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 and containing high grades of four metals in one ore. Sourcing battery metals from nodules requires no digging or blasting and produces near zero solid waste and far offshore, we also don’t have to displace human communities, nor build the costly fixed infrastructure necessary to access mineral resources on land.

And 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. And 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, and new chemistries are in development, though these can take decades to commercialize, if ever, and based on our conversation with major OEMs, many new batteries are expected to continue relying upon nickel rich chemistries. Of course, we cannot forget the additional demand pressures for the metals contained in nodules, including infrastructure, the ongoing industrialization of the developing world, and the addition of 2 billion people to the planet.

As we’ve said many times before, our resource is an outlier among the world’s nickel projects. Not only are NORI and TOML ranked by mining.com as the largest two undeveloped nickel projects in the world, but 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 estimated recently that 50% of the nickel cost curve was loss-making at current nickel prices on an all-in sustaining cost basis. So 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 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 leading think tanks acknowledging that commercial operations will soon be a reality. And 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. And 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 that started this industry as a question of when rather than if and when is coming even sooner.

So 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 begin planning for the development of processing and refining capabilities for deep-sea nodules. Most recently with the introduction of the Responsible Use of Seafloor Resources Act and with the signing into Law of the National Defense Authorization Act by President Biden, the Pentagon has now been tasked with formulating a report assessing just how the US might process nodules domestically, but more on that shortly. Increasingly, policymakers and the broader political community are driving the conversation. As reported in The Wall Street Journal this month, a bill aimed at providing support for domestic nodule collection, processing, and refining has been introduced by members of the House of Representatives, with support from a broad coalition of leaders drawn from the offshore energy industry, marine mineral exploration, and global research centers.

Also this month, over 350 former political and military leaders, including former secretaries of State and Defense, Hillary Clinton, Leon Panetta, urged the US Senate to ratify the Law of the Sea treaty and take its seat at the table on ocean matters. Of course, this recent spate of news has taken place within the context of the pending delivery of a report by the Pentagon to the House Armed Services Committee, assessing the opportunities offered by nodules to diversify critical mineral supply chains away from China. So, at a minimum, the report will outline controlling parties of deep-sea resources, America’s current production and processing capabilities and, crucially, a roadmap laying out recommendations for how the US can leverage its domestic industrial expertise and capabilities to process nodules and play a leading role in the industry.

Though the March 1 deadline was ambitious, our conversations with relevant parties in the DoD and Congress give us confidence that the team readying the report are well aware of the challenges of metal supply and the opportunities that nodules present. And we remain optimistic about the prospect of funding to do feasibility work on a potential US refinery, which can take nodule-derived products as feedstock, whether through our existing DoD grant application or through congressional appropriations. This underscores the massive longer-term potential that we represent for the United States, which could go 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. And I’d now like to turn it over to Craig to discuss the progress of our NORI-D project.

Craig Shesky: Thanks, Gerard. Speaking of PAMCO, we were pleased to announce in November of last year that we signed a binding MoU with PAMCO to process the first nodules when commercial production operations are expected to begin in 2026. PAMCO is planning a commercial-size pilot in the second quarter of 2024, and 2,000 tons of nodules that we collected during NORI’s mining test will be processed through PAMCO’s existing RKEF plant. We’re also pleased to announce that we’ve demonstrated we can turn nodules into nickel sulfate, indicative of battery — excuse me, there’s been a bit of a change in the slide deck. There we go. We are also pleased to announce that we’ve demonstrated we can turn nodules into nickel sulfate, indicative of battery market suitability pending the confirmation of the preliminary assays.

The sulfate was produced in a program testing our efficient flow sheet design that processes intermediate nickel mat, direct to nickel sulfate without making nickel metal, and produces fertilizer byproducts instead of waste. And for nickel sulfate, we’d just like to quickly remind everyone what a game changer that is to potentially produce nickel sulfate at a much smaller carbon footprint than all other nickel flow sheets analyzed in last year’s benchmark lifecycle assessment. As noted on our last call, we’re devoting a majority of our resources to our environmental impact statement and pre-feasibility work. And we’ll start with the pre-feasibility work. For the offshore segment of the PFS together with Allseas, we’ve gone through several mine planning iterations, and design reviews of the Project Zero nodule collection and transport system.

For the onshore segment of the PFS, we’ve made great progress in Japan, where PAMCO has done considerable work and has validated that seafloor nodules can be told through their current facility, producing intermediate products that align with our specifications. The expected buying agreements with Allseas and PAMCO will be key inputs for the PFS modeling work, including CapEx and OpEx estimates for Project Zero expected to be coming later this year. Over the past 12 years, we have conducted 22 offshore campaigns to develop an environmental baseline throughout the water column to trial our pilot collection system and evaluate the impacts of test mining. The breadth and the scale of this research program is unprecedented in the deep ocean, and it will provide the regulator and society with the data needed to make informed decisions.

And with our latest offshore campaign is now complete, we now have a far greater understanding of what the actual impacts of nodule collection look like as opposed to some of the previous conjecture, which frankly has no basis in any observed data. We can tell you it’s a radically different picture, and more on this shortly. With the data collection and compilation phase for pre-commercial operations now complete, our team is working tirelessly on the development of our environmental impact statement that will form the backbone of our application for an exploitation contract. The EIS is the most work-intensive element of our application, along with our environmental mitigation and monitoring program, and it requires the publication of peer-reviewed research papers based upon the hundreds of terabytes of gathered data before, during, and after pilot test collections.

These papers are in preparation and we look forward to sharing our findings in peer-reviewed journals in the coming months to support our application to the ISA. Last year’s collector system test again provided or, excuse me, 2022’s collection system test provided a historic moment in the development of this industry and just beyond the over 3,000 tons of nodules collected and lifted to the surface, one of the most important outcomes of the test was the ability to observe real-time impacts and generate those 100 terabytes of infield data. And this accumulation of baseline data over the past decade-plus represents the most comprehensive deep-sea data set ever collected in the Clarion Clipperton zone and collected in partnership with many of the world’s leading marine research institutions and expert industry contractors, many of which aren’t named on this page.

The data set is generating much excitement among researchers who have acknowledged the rigor and scale of this science program. The data is also openly shared to public databases including the ISA’s deep data library of contractor data, as well as other open-source databases like UNESCO’s Ocean Biodiversity Information System, the world’s largest catalog of marine organisms. And zooming in on our post-collection test environmental campaign, our own Katie Allen will lay out some of the key tenets of the research performed late last year. We now like to play this video, please. [Video Presentation] More importantly, on the next slide, you’ll also see some of the images on the left side of this page taken right after that collection test compared on the right side of this page to images taken from the one year following post-collection test campaign.

Now, qualitative data shows that these are individual organisms, the exact same organisms on the left as they are on the right, that are present and alive one year following the collection test. And this even applies to organisms that were right next to the vehicle tracks. This information, of course, is preliminary and anecdotal, and it’s going to continue to be analyzed and shared, but it’s one of the reasons that our team is so encouraged by the initial results of the monitoring campaign one year following the collection test. Now, during that collection test, we also successfully monitored the plume using myriad assets that were in the water, which are described in this infographic. This is an image presented to scale, unlike much of the speculative imagery presented by opposition groups.

You’ll notice that the midwater plume is represented by a small white wisp in the middle of this page, and most of it, frankly, would be so dilute that it wouldn’t even be visible to the naked eye. The seafloor plume, also known as the benthic plume, also barely registers on the bottom of the graphic. Leading experts in the field deep-sea sediment plume dynamics, including a team led by Dr. Thomas Peacock at MIT and researchers at the Scripps Ocean Institute, have found that 92% to 98% of sediment disturbed during offshore system trials conducted by our fellow contractor GSR, remained within 2 meters of the seafloor. And as noted in the conclusion of the study, it’s quite a different picture of what the plumes look like compared to some of the conjecture.

Now on our own ground in the NORI-D area, preliminary findings by leading experts at DHI support the findings of MIT. Our team set over 50 monitoring stations to monitor every aspect of the plume during noise collector trials last year. An infield observed data indicate that the sediment plume is low-lying. Over 90% of the sediment initially stays less than 2 meters above the seafloor. The sediment plume initially forms a turbidity current, which is a gravity-driven spreading of sediment laid in water under its own weight away from the collector tracks, following the contours of the seafloor, behaving more like a liquid running along the seafloor than a gas, which might waft higher into the water column. In fact, as noted on the right-hand side of this page, most of the green or blue bands from this DHI model will be clear enough to swim in, and much of it would be clear enough to drink, of course, it will be freshwater.

This is a clear example of the speculation of opposition groups initially getting it wrong, and frankly, majorly wrong. An infield observed data needs to take precedence over such speculation. Perhaps this is why Greenpeace in particular has pivoted from once calling for more scientific research to now trying to stop our own scientific research. But in this effort, they have not succeeded, as our key offshore campaigns are now complete prior to our application and they can’t stop the increasing flow of data that we are now openly sharing with the world, including the International Seabed Authority which brings me to the regulatory update. We’ve been very encouraged by the progress at the most recent ISA meeting in Jamaica, is further evidenced by the positive commentary from Secretary General, Michael Lodge, on this industry’s inevitability.

And our team is on the ground in Jamaica as we speak, and we are getting regular, real-time updates on that ongoing process, all going very constructively. Regarding negotiations on the final rules, regulations, and procedures the consolidated regulatory text was released in late February, signaling the transition to the phase of final Mining Code negotiations. And as noted earlier, we maintain our previous guidance on our intention to launch our application for an exploitation contract following the July 2024 ISA meeting occurring later this year and assuming a one-year review period, estimated production occurring towards the end of Q1 of 2026. On the next slide, you’ll see the timeline for exploitation application review from the draft regulations.

This breakdown has been updated based on the draft consolidated text and has been reflected in our current estimate for beginning production around the end of Q1 2026, assuming a review process of approximately one year. I’d like to remind everyone of the highlighted portions of this slide. Oftentimes people think about the regulatory process as some black box, when in reality the steps for approval are even more clear and codified than many land-based jurisdictions. One of the key decisions on our application is a recommendation from the Legal and Technical Commission or LTC. It’s not a decision made by some executive branch politician back in the national capital where there is a risk of revocation whenever there’s a new administration. These are 41 individuals of the LTC that review the application and they are all subject matter experts.

If a consensus on approval for a recommendation is not reached, decision is made by a simple majority vote, and if the LTC recommends approval, the council reviews and if acceptable approve that recommendation. You would need two-thirds majority of the ISA council to overturn an otherwise positive LTC recommendation. So certainly we expect plenty of back and forth and questions from the LTC both before and following our application. But we feel very positively about the ability of our application to stand on its merits during what is a well-thought-out review process. On the project economics, as shared in previous update calls [Technical Difficulty] in March of 2021, AMC Consultants issued an SEC Reg S-K 1300 compliant initial assessment of the project economics for the NORI-D area.

This initial assessment is available in the Investors section of our website, and the NORI-D financial model can be found beginning on page 310 of that document. The initial assessment arrived at net present value of $6.8 billion for NORI-D at the beginning of last year. We are running the same model simply updated for current metal prices, the net present value of NORI-D would be approximately $8.1 billion. Despite a higher share price now than our previous report, we are still only trading at roughly 6% of the underlying NPV for the NORI-D area at current metal prices, which remains a massive discount to peer developers, which to us means that our valuation can naturally improve if we keep on delivering on our project milestones. So on to the financial update.

In the last quarter of 2023, TMC reported a net loss of $33.4 million, or $0.10 per share, compared to TMC’s net loss of $109.5 million, or $0.41 a share, for the same period of 2022. The net loss for the last quarter of 2023 included exploration and evaluation expenses of $26.7 million versus $104.3 million in Q4 2022 and general and administrative expenses of $6.5 million versus $7 million in Q4 2022. Exploration and evaluation expenses decreased by $77.6 million in the last quarter of 2023 compared to the same period in 2022. The significant decrease is primarily due to the recognition’s cost representing the fair value of the Allseas warrant in the last quarter of 2022. The completion of the pilot mining test in the same period last year, and a reduction in environmental study cost as the collector test was completed in 2022, partially offset by the monitoring work on NORI-D, which was carried out in the fourth quarter of 2023.

These cost reductions are partially offset by an increase in engineering work which advanced to the course of 2023, an increase in exploration labor costs mainly attributable to an increase in headcount and the higher sponsorship, training, and stakeholder engagement costs. General and administrative expenses decreased slightly by $0.5 million in the last quarter of 2023 compared to the last quarter of 2022. Within the other items, the largest movement between the last quarter of 2023 and the same period of 2022 is a change in the fair value of the Warrants liability in alignment with the change of the company’s share price. In the last quarter of 2023, the net cash used in operating activities amounted to $15.2 million compared to $19.8 million for the last quarter of 2022.