SeaBird Exploration Plc (SBX) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to SeaBird Exploration's Fourth Quarter Conference Call. My name is Stale Rodahl, I'm the Chairman of the company. I'm here with Gunnar Jansen, our CEO; and Erik von Krogh, our CFO. Yes, next. So today, the presentation we're going to go through is along the following main lines. We're going to look at the turnaround that was implemented in November 2019. We're going to look at the results of that. We're going to look at the platform that has created for profitability and growth from 2021 going forward, and we are going to look at the green minerals. And of course, we'll run through the numbers in the end. Next, please. Most of you know SeaBird. But just to sum up, we deliver cost-efficient, high-quality seismic services, and we are a pioneer in marine minerals, that is our 2 business areas. Next. SeaBird is the lowest cost seismic service provider globally, and we are a leader in marine minerals on the Norwegian Continental shelf. Next. This is the overview of our seismic services. They are centered in the main around 2D seismic acquisition and OBN source vessel operation. And then we have 3D shallow water capabilities and, of course, maritime services. Next, please. Our business model is return focused, built on the 4 pillars that we see on this page: Capital efficiency, where the modern and flexible fleet that we now have ties into it; a strong balance sheet, allowing us to maneuver also during tough times; and a very lean and efficient organization. In November 2019, we launched a restructuring strategy for the company based on the following 3 pillars: A more asset-light vessel strategy to relocate and reorganize into project-based organization and to cut costs deeply. This allows us to focus on capital discipline and efficient quality service delivery. Next, please. Looking at the results of the turnaround then, we were particularly happy to be able to sign a bank financing agreement at the depth of the COVID crisis in the second quarter last year. This financing allowed us to refinance our bond loan in addition to providing finances for the growth projects we have in hand. We cut SG&A then by 40% as promised. And you can see on the chart to the right, the quarterly development there and also projections forecast for 2021. We've done this through a 65% smaller headcount. We have reduced the number of offices from 3 to 1, putting everybody on the same floor in Bergen. Having done this complete overhaul of our operations, we have simultaneously been able to cut technical downtime sharply, as you can see on the chart to the right, and we are particularly happy with this development that the quality of our operations have been increasing at the same time as we have been reducing the size of the organization. This has also had a positive impact on mobilization efficiency, which is particularly important when it comes to being able to get margins out of the total package of our contracts. We also obtained a flexible charter on a new vessel. And we've done this as we have scrapped 3 old vessels, which is a very satisfactory development in our vessel portfolio. This has created a sound platform for profitability and growth from 2021. Next, please. The outlook then. Our ambition is to lift profitability, to accelerate growth and to create value for our shareholders. We will do this along the 4 main lines of investment. One is to outfit the Fulmar Explorer as a top-of-the-line OBN vessel, and we are working hard to get that vessel out in the marketplace as soon as possible; further, it's to outfit the Geo Barents against contracts, same there; to find work for the Petrel in other segments than OBN and 2D, that is; and to spin-off and list Green Minerals to crystalize values and also creating a leading player on the Norwegian Continental shelf. On Green Minerals then. There's been a number of questions on this company. We're going to take the time to go through a few slides today. Focusing on the mission of the company, the rationale now for doing Marine Minerals, we're going to look at resource potential and licensing processing on the -- process on the Norwegian Continental Shelf, and we will look at some exploration techniques and tools in conjunction with production, where there's also been a lot of questions. Next. So who are we? Green Minerals is a pioneer in offshore mining and a leader in Marine Minerals on the Norwegian Continental Shelf. Our mission is to enable digitization and electrification, and we're doing this by mining on the deep seas. This type of mining helps eliminate the huge social costs in onshore mining while reducing the environmental footprint by more than 90%. So the rationale for mining or marine minerals apart from the social and environmental arguments I just made. If you look at the third rationale then, which is the demand-supply balance of minerals in the world, of course, the trends, the 2 important trends of the green shift and the digitization means that the intensity of use of these minerals and metals in the economy is increasing sharply. This is happening at the same time as the supply of these minerals is under pressure from declining ore grades and an increasing need for ever more land areas to get to the marginal tonne of minerals. And the way this exploration is being done onshore, the environmental impact of that is simply not sustainable. Mining these in the deep oceans, which makes up around 70% of our planet, therefore, has a strong argument for it. On the geopolitical scene, it's worthwhile to note that 20 years after China, the U.S. and Europe woke up 2 or 3 years ago. In the U.S. in May 2018, the Department of Interior actually published a list of 35 minerals considered critical not only to the U.S. economy but also to national security. That is worthwhile noting. The [indiscernible] sector is a big off-taker of these minerals. And at the moment, these minerals, to a large extent, is being controlled by China. This is a large issue for the EU and the U.S. Next, please. We support 6 of the UN sustainable goals and the EU Green Deal. I will, in particular, like to draw your attention to #8 and #15. #8 in fighting child labor. As you know, some of this mining, in particular, for cobalt, in some places, there is an extensive use of child labor. Putting this industry into best industry practices then, will eliminate this child labor. On point #15, reducing deforestation. Of course, mining offshore cuts deforestation by almost 100%. Next, please. Mineral usage and importance. I won't go through all of this. As most of you know, the Marine Minerals and Rare Earth elements are critical in the renewable energy industry and in modern technologies and electronic appliances. Just a couple of examples here. An electric car, the intensity of use of copper there is 3x to 4x what you find in an old combustion engine car. Same, if you look at wind turbines, the use of copper is really large. The same goes for solar plants. And batteries, the intensity of use of some of these minerals is also very large. So in order -- the pointer is in order to make the green shift happen, the primary stock of these minerals and metals need to increase a lot. When it comes to copper, the projections for use or for demand over the next 25 years is similar to old copper. It's at the same amount that to old copper that has been produced over the last 500 years. Next, please. So where do we find these minerals? The map shows -- the blue shaded areas on the map show occurrences of minerals around the world. They can be divided into 3. It's Nodules; it's Seafloor Massive Sulfides, SMS'; and it's Ferromanganese Crusts. The Nodules, you find them, in particular in the Clarion Capital zone in the Pacific Ocean in the middle of the picture there, while the Norwegian Continental Shelf holds SMS deposits and crusts. And you see the various intensities of these various minerals in the table to the left, depending on occurrence. Next, please. Typical minerals on the Norwegian Continental Shelf then is -- as I said, SMS and crusts are the occurrences along the Atlantic Mid-Ocean Ridge, which is the one we have on the Norwegian Continental Shelf then. University of Bergen has been doing research activity for 2 decades on these resources. And the Norwegian Petroleum Directorate has been sampling data over the last 3 years, and they also have a program going for this year. The SMS samples are particularly rich in copper. And it's worthwhile noting that number, up to 14% gehalt in the resources there. This can be compared to onshore mining where new resources found, for the most, you see grades below 0.5%. So these are very, very rich -- copper rich resources. When it comes to the crusts, they are typically rich in Lithium, Scandium and Rare Earth Elements. And we see also there that on the Norwegian Continental Shelf, the quality of these resources or the richness of them is -- are really impressive here compared to what you typically find on the Nodules in the Pacific Ocean. We're up to 80x on Lithium. So on the Norwegian continental Shelf then, the main minerals being found would be Lithium, Scandium and, of course, Rare Earth Elements and copper, zinc and cobalt that we will be mining for. Next, please. Value potential on the Norwegian Continental Shelf. It's a well-defined area. The Mohns & Knipovich Ridges, it's a valley, 1,030 kilometers long and it's around 10 kilometers wide. The play assessments used here are similar to the standards used in the Oil & Gas industry. And based on that, Ellefmo from NTNU has written a book, and you can look that up on our website, greenminerals.no, where the -- he estimates a resource potential of more than NOK 700 billion in this area. So a large -- very large resource that is. Next, please. When it comes to the opening process, the tentative time line looks as follows. The opening started with the SeaBird Minerals Act that was approved in 2019. Then there's been a consequence analysis going on and the public hearing. There was a press release sent from the OED only a couple of weeks ago regarding this. We expect parliament to approve this early 2023, possibly fall 2022, and that the server licenses will be awarded immediately thereafter. Next, please. When it comes to exploration techniques and tools used here, we are looking at the wide range of techniques, and they would be used at different phases in the exploration for these minerals. You will see amongst other seismic, high-resolution seismic. This is, of course, where SeaBird comes from, but a number of other techniques will be used to explore for these minerals. So we are busy working on setting up the optimal exploration program using several of these techniques. And I can say that AUVs and ROVs will be used extensively in this work. Next, please. When it comes to the production system, it is based on 3 main elements. It's the Seafloor, where various types of mining tools will be used, so very much technology from the mining industry. There is a vertical transportation system, bringing the ore up to the surface. Technologies used very much from the oil & gas industry. And then there is a surface facility, typically with the ship and an offloading system. Now the technology to do this production and to bring the ore up is mostly known from Mining and from Oil & Gas. But I think the key word to -- when one thinks about the production system here is innovation. We are looking at various elements from those 2 industries, and we will be designing our own production system, as we think we can optimize the elements from these various 2 industries and the cross-section between them. Next, please. Aspirational targets then. On exploration, we are very firm that our target is to receive more than 1 server license within 3 months after opening and to be awarded 3 production licenses by early 2024. We believe we will have minimum 1 discovery of SMS with more than 5 million tonnes deposit by year-end 2024, and this will allow us then to put the production system into ordering. If you look at our production system then, we aim to have 1 system operational in the late end of this decade. The transport capacity what we're working on currently indicates 5,000 to 8,000 tonnes per day of ore to surface. We are hoping to improve that, but these are the numbers currently. To allow for some weather, we calculate with 200 days per year operations, which means that we will bring up 1.5 million tonnes of ore per year. That means that one such discovery of SMS, it will take us slightly more than 3 years to produce that -- produce from that discovery. The annual revenues from one Green Minerals production system then will, on these numbers, be around $400 million for copper only, and then there are other minerals that we will bring up as well. But only for copper, more than $400 million. Metals prices have moved somewhat since we made these calculations. So we -- to translate it into Norwegian kroner, we are now, on numbers, above NOK 4 billion per year producing from this system. I want to draw your attention to the efficiency of this ore. So revenue per tonne ore will be 10x to 20x higher than similar onshore because of the gehalt of this ore. That means that -- and we step back, the -- if you look at the cost picture then for mining, around 50% of cost are in processing. And with this kind of ore, we're looking to reduce processing costs with more than 90% compared to similar onshore, allowing for very attractive margins, we believe. And again, the environmental footprint from doing this offshore will be 90% lower than similar onshore. We also included the table from a report by Rystad last fall. We don't -- while we know about one deposit is 30 million tonnes, but we don't think this is representative for Norwegian Continental Shelf. But just for illustration purposes, we can look at the numbers on the gross level, and their revenue number would be around 10% lower than ours. And the IRR of around 30% is a number that we recognize. And this is also the reason that we have chosen to invest into Marine Minerals as our, call it, investment into the green transition or the green energy transition simply because we have not been able to find any other segments with the profitability even close to what we see in Marine Minerals. Next, please. So the strategic goals. To be recognized as a pioneer in offshore mining and a leader in marine minerals, this is for the short term. For the medium term, to win licenses, as I just explained, to survey, explore and produce Marine Minerals on the Norwegian Shelf, thereby capitalizing on this NOK 700 billion worth resource potential. And for the longer haul, we will be aiming to bring our technology, our deepwater technology out to other areas of the world. Next, please. So highlights for Green Minerals alone. As the company will be listed in Oslo sometime during the first quarter, we are pursuing a NOK 700 billion opportunity. The production system has the potential to generate over NOK 4 billion in annual revenues once it is operational. We will be targeting EBITDA margins above 50%. We're targeting key minerals vital to electrification and digitization. We are sharply lowering the environmental footprint, and we eliminate the social cost in the mining industry. At the same time, we're helping to solve a geopolitical dilemma for EU and the USA. We're doing this on the back of our parent company, SeaBird, which has 20 years experience in offshore exploration globally. Again, we are targeting more than 1 license in the first license round. And lastly, we are the only listed company in Marine Minerals providing first-mover advantage on the Norwegian Continental Shelf. Next. And with that, over to Gunnar and Erik, please.

Thank you, Ståle. Okay. Okay. SeaBird fleet is a modern fleet as we already commented on. It's a flexible fleet, both in terms of functionality. The vessels can or will be able to [indiscernible] the operations. And to an extent, the fleet is also flexible in the sense that 2 of the vessels -- or 3 of the vessels are flexible time charter terms, which provides SeaBird with a flexible cost base. Vessel utilization in the quarter was 29%. That includes only the owned vessels and excludes the vessels on the flexible charters. Contract revenue in the fourth quarter was based -- or was -- came from a source of -- or being a source operations, contracts for Voyager Explorer in the Far East and the Eagle Explorer in the Gulf of Mexico. Voyager, as I said, was operating until mid-November on a source contract in the Far East and has successfully competed that. And Eagle Explorer mobilized for OBN source contract in the Gulf of Mexico in November and started that contract in -- on the 26th and is still on hire to the clients. Petrel and Fulmar are still idle in the North Sea. But as Ståle mentioned, there are plans to get those vessels also operational. We're focusing on that. Market trends. Q3 -- in Q3, we saw the impact of the COVID-19 situation on tendering activity. And -- but already starting Q4, we began to see signs of improvements in tendering activity. And as this graph shows Q4 -- close to Q4, tendering activity was back to approaching the levels in Q4 '19 and Q1 in 2020. Most of the tendering activity and activity that we see is in OBN with the geographical focus areas being the Gulf of Mexico and West Africa, and we also see a significant increase in future activity or plans for OBN activity in Brazil. The 2D activity is modest, which is also in line with our market expectations, at least in the short- to mid-term. It's also good to note that, that we see a revival of postponed tenders and surveys that were canceled or postponed in the previous quarters due to the COVID-19 situation.

Okay then. I'll continue with the financial review. Starting with the key figures. And as Gunnar already mentioned, the utilization for the quarter was 29%, while the utilization for the full year was 34%, reflecting the challenging market that we have been improving. And despite this, we managed to achieve a positive EBITDA of $0.2 million for the full year, which we are very pleased with. And this is a result of low cost, combined with a very good technical performance for the vessel. These slides show revenues and EBITDA for the last 5 quarters. And as you can see, they also reflect the low activity in the market. In the last 2 quarters, we've seen -- we are starting to see the effect of the cost reduction measures that will be improved that Ståle also mentioned. And we have reduced the SG&A costs with about 40% from the second half last year compared with the second half of this year. And we also expect a further reduction going into this year. Then the CapEx for the quarter is low as expected. As earlier communicated, we don't intend to do any major investments before the outsetting of Fulmar Explorer. On the capital structure, I'm just -- I just want to comment that excluding payables and receivables related to an outsourced 3D job, the equity ratio is 70% instead of 59%. So when this -- while we have received all funds, the equity ratio is expected to increase. And the cash at the end of the year was $6.3 million, of which about $3.5 million relates to Green Minerals. So that concludes my part of the presentation, and I will pass the word back to Ståle for some final remarks.

Ståle, will you please turn on your phone?

Yes. Thank you, Erik. So in summary, then, the main points we want to get across is that SeaBird is becoming an enabler for the green transition through Green Minerals. The company is returning capital to shareholders following the worst year ever for the industry, and we aim to continue to maximize shareholder value also going forward. We see continued strong operational performance following the turnaround. And now the market seems also to be turning up. As Gunnar showed, tendering activity seems to have thrust in the second and the third quarter in the depth of the COVID crisis and also oil prices are looking up. So we are seeing more interest, more activity amongst our clients. And finally, having spent these last 15 months restructuring the company and having had the COVID and oil crisis thrown at us as well increasing the challenges to get this done, we are -- now very much feel that we have created a good platform for the company to be able to show profitability and we have also then, as we talked about, secured this financing to allow us to pursue some targeted growth areas that we have very high expectations for. Next, please. And then lastly, for those of you who haven't followed the company that closely before, why invest in SeaBird Exploration. The company is now the lowest cost provider, by far, in the seismic industry. It runs a very capital-efficient strategy, and we intend to continue to improve on that capital efficiency. A modern flexible fleet that adds to this cost advantage is an important pillar of that. We see in the marketplace delayed projects in 2020 coming back to life, and we expect that and higher oil prices to spur growth for our segment in 2021 and onwards. The company has a strong balance sheet and is fully funded for these targeted growth areas. And last but not least, even after the horrible 2020, we are able to crystallize values and return capital to shareholders by spinning off and listing Green Minerals in the first quarter this year. And that, I think, concludes it from our side. So we can then open up for questions, and I can't see them. So I'll return it back to Gunnar and Erik for the questions then.

Okay. We have the first question from Mr. John Olaisen, and the question is what is the funding need for Green Minerals going forward?

Well, I can answer on that. The funding need for Green Minerals is such that we have raised NOK 30 million which is enough for us to do the initial work on the design process, both on the exploration campaign and to design the production system. When we get further out and closer to the actual exploration, which is 2023, we need to raise further capital to do the exploration. And of course, with the production system, the big bulk of CapEx will come when we start ordering for the production system. In total, we are still some ways of the exact design on the system, the exact numbers. So these are going to be very ballpark figures, but you can count on CapEx to be north of $800 million for the production system, and we think a total around $1 billion to get this in place is a reasonable number. And that capital, of course, the split and how we do it is still an open issue. It will be a mix of equity. It will be a mix of debt financing. It will be a mix of partner financing. And also, we are tying into the EU Green deal on this project. So the exact composition of the capital is not clear yet. Any other questions?

As far as I can see, there are no other questions.

Okay. All right. Well, let's leave it there then. Lots of slides to go through. You find -- of course, the presentation is on the SeaBird's website. I can also just update you on the same website, there is a button called DSM, Deep Sea Mining. Going in there, you can also enter into Green Minerals website. And on the Green Minerals website, you will find the presentation or an expanded version of the presentation that we've looked at today, under the Investors section there. So please do have a look and do not hesitate to come back and ask questions if there are any.

So we've just got 1 more question from Irmantas Vaskela from Norne Securities. You are planning to find work for the Petrel Explorer in other segments. What could that be?

These other segments can be a whole range. So that's why I also said that it will be other segments than 2D and OBN, which are our core segments. So we are looking at a wide range of opportunities. It can be -- as you know, Petrel used to work for EMGS, on electromagnetic service, and it can be everything from electromagnetic service to Marine Minerals surveying and everything in between. It can be SeaBird work and various type of surveying work in conjunction with that. So there are quite a few opportunities. There has been -- to expand on that answer, there has been some questions about wind and why we don't convert at least one of these vessels into the offshore wind market, walk to work vessel or designs like that. And I can say that we have looked at it and we are just not happy with the profitability levels that we're seeing. So until -- we are very restrictive on this. We would like to -- we believe in the energy transition and we very much want to be a part of it. We think this is the way that the world is moving and, of course, we want to move with it. But we will be very strict on returns for capital numbers. We need to see profitability in the projects that we enter into, not just because capital is available in certain segments. So we have so far declined, and we think we can find better or, call it, we can find more profitable work in other segments. Any other questions?

There are no other questions.

Okay. Well, then I think that concludes the call. Thank you very much, everyone, and thanks for listening in, and we will see you again in 3 months. Thank you.