TMC the metals company Inc. (TMC) Earnings Call Transcript & Summary

My name is Dmitry Silversteyn, and I'm a senior analyst covering the Chemicals and Materials Technology vertical here at Water Tower Research. Joining me today are Gerard Barron, Chairman and CEO of TMC, the Metals Company; Craig Shesky, the company's CFO; and Grant Lindner who was recently brought on Board as a Project Director for NORI, which is the company's first resource project in the Pacific Ocean. Welcome, gentlemen.

Thank you, Dmitry.

Thank you.

Gerard, my first question is for you. TMC is an explorer of deepsea polymetallic nodules in the Pacific Ocean so-called Clarion-Clipperton Zone, which is an area of the ocean between Hawaiian Islands and Mexico. What does it all mean? Tell us about the resource itself and how big it is and perhaps tell us a little bit about sort of what it is that TMC is hoping to accomplish here?

Thanks, Dmitry. Well, we have three licenses in this one area of the Pacific Ocean. It's an area known as the CCZ, as you mentioned. And it's littered with these polymetallic nodules, like the one I hold in my hand or you can see on the picture that literally lie on the seafloor. And they formed through a very slow precipitation process where they precipitate the metals that are in solution, in the seawater or the sediment upon which they sit. And they were discovered more than 150 years ago. And 50 years ago, the industry almost got started. You saw names like BP and Shell and Mitsubishi and Lockheed Martin and all participate to build systems to collect them and Rio Tinto process them and -- but 50 years ago, the United Nations then stepped in and stopped them because the world had not agreed who owned the oceans. And that's why now is such an exciting time because it was all sorted out when UNCLOS was finally agreed and UNCLOS stands for United Nations Convention on the Law of the Sea. And that basically define the rules. It said that a sovereign owns everything within 12 miles of their coastline and they have an economic right for everything within 200 miles. But beyond that, it would be the common heritage of humankind. And it would be governed by this body called the International Seabed Authority. So we hold three licenses. You can see them on the map here, yellow, black and red, and they're sponsored by three developing countries because you need to be either a member of the International Seabed Authority and a signatory to UNCLOS, or you need to be sponsored by one of those members. And so they really wanted developing countries to be involved, and so they allowed them to sponsor a company like us. And while we hold the license, our sponsorship agreement provides jobs, training and most importantly, for those nations, royalties into the future, which can really help them diversify away from their current income streams, which are foreign aid and fishing rights. And so it provides a community who've had no impact on climate change, yet are in the front line to be impacted. It provides that community with an income stream so they can rebuild. So what we've been busy doing is identifying the resource, carrying out environmental studies so we can better understand baseline, what we're going to impact. I am in Manzanillo, Mexico today because we're welcoming back the hidden gem that's been out to sea for two months, running our pilot collector trials. That picture that Craig had on the front before was the nodules that are in the hull of the hidden gem. We're bringing back about 3,000 tonnes of them, and so we're making a fast track towards commercial production. And I mentioned now is the exciting time because the last piece of that jigsaw, the exploitation regulations are on track to be in place in the second half of next year. And that will allow us to then submit our application to move from exploration to exploitation and we can then pick them up and sell them. And of course, we all know the macro trend here. The world has woken up to the fact that decarbonizing is going to be very metal intensive. And the question is, where are these metals going to come from? The geopolitics make it tricky at the moment because China dominates the supply. Russia has plays a major hand as well. And so for nations like the United States, where are they going to get the metals to build out this infrastructure. And we think that our resource is one of the only resources on the planet that can service that. And the picture Craig has just shows you we've identified on the right 1.6 billion tonnes of these nodules on two of our licenses, and that's enough to electrify the entire U.S.A. passenger fleet. And some of the other projects that are being talked about are just a much, much smaller. They really can't move the needle. So it's an exciting time, Dmitry, and we're charging towards having our application ready to go in the second half of next year. And of course, that's why we're very excited to welcome Grant into the organization because he's had a career of delivering these big projects, and that's the phase we're at now.

So that's a good lead into my next question, it is actually for Gerard as the most recent team member to join the company as a Director of the NORI Project, which is the first area that TMC is exploring and looking to exploit. Grant, can you tell us a little bit about your background and project experience at Bechtel and BHP, and sort of talk about your career path up to this point?

Absolutely, Dmitry, and thanks very much for having me on today. And look out, I'm looking forward to bringing something different to TMC. And as Gerard said, it is time to really grab our hands around the exploitation and getting ourselves ready to go into production. So from my experience, I've come from -- bringing a lot of major projects to the market, and ultimately, then doing the execution of those works. And in the pack, we've got -- from my career perspective, I've been working through Olympic Dam for BHP, again, copper, uranium, mineral resource, ultimately there, a major, major job in itself, $2 billion worth of works conducted through to Comalco Alumina Refinery on the Eastern Seaboard of Queensland, producing from bauxite into alumina powder ready to be smelted in Gladstone itself. Again, a major component of works. Working for Rio Tinto as part of Bechtel's team as a project manager over a scalable works program that did $2.5 billion worth over close to 8 years where we were able to rightsize and scale up and down the program of works to suit. So that ultimately works into what we're doing today with TMC. And Hay Point expansion, as you can see there, a $3.2 billion expansion of the outgoing facility and growing the outloading stream. All of these are all about expanding and doing those in a brownfield's environment. So lots of interface with stakeholders and management and doing those projects in the Great Barrier Reef Marine Park. So lots of work with the regulators and the like. So understanding what it actually takes to get a major project off the ground is something I'm bringing to the table. And...

I'm sorry. Go ahead.

You're right. And then you've got the Amrun project for Rio Tinto, again, bauxite, greenfield's project, a mine lease of the size of 65,000 square kilometers. So if we talk about our mining area for NORI-D alone, we're talking similar sizes in regards to the areas that we've been managing in the past. And doing all of these in traditional owner lands as well. So looking at the relationships with traditional owners and bringing those persons along for the journey with us. Western Sydney Airport, a major infrastructure project working at this point in time. And as a Deputy Project Manager for that works was instrumental in the front end of that to set that up. And then, ultimately, my last one that came off prior to joining TMC with BHP, another expansion of Hay Point again and the replacement of -- to enjoy the fruits of continued export of coal material.

Well, thank you, Grant. That is a very good overview, and it certainly demonstrates your expertise in dealing both with regulators and government agencies as well as environmental issues and working in industries that have had some environmental, let's call them, not problems, but certainly issues in terms of activists. So I understand that, that is probably one of the reasons that TMC has looked to you as a Project Manager or Project Director, but sort of what made you eager to join TMC, which is a smaller company, a developer and a brand-new industry for you in terms of metal extraction and mining?

Yes. And that's a great question. And I think the key thing for me was that the TMC, really, it is bringing a changing in the world in regards to where metals are traditionally mined from. And, in doing so, I see this as a turning point in the industry. And ultimately, for me, it was an exciting opportunity to be on board at the front end and ultimately help change the world because, ultimately, that's the way I see it. And this is so exciting to be part of and to be part of the team to take this forward. And I suppose, secondly, the next phase of the thing that really attracted me was, when I met with the team was just the passion, the enthusiasm and actually the professionalism that was within the team. It's a highly functional team, and I thought this is a real fit for me. So those are probably the two key things that allowed me to make that decision to come on board. And, to date, I'm so excited to be here.

That's great, Grant. And I'm sure Gerard and Craig are very excited to have you on board as well. Craig -- I'm sorry, Gerard, you mentioned sort of the size of the resource and kind of the nature of these polymetallic nodules. How do you actually get these nodules off the seafloor and up to the surface and into refineries -- and smelters to process it into metals? Is it really mining? Or is there a different sort of approach to get this resource up out of the water and onto shore?

Well, this might provide a great chance to play a short video because we've been out there testing our pilot collecting system over the last two months, and it's been in the water since February in the North Sea and the Atlantic. But we've actually been on the license area with a second vessel filled with monitoring the pre, the during, and the post. But the resource has some unique characteristics, Dmitry. And the main one is where it's located. So it's in the abyssal zone that's 4,000 meters below sea level. There are no plants down there, no flora at all. And more than 80% of the fauna is bacteria living in the sediment. So that's the beginning point. And the second great feature is that they literally lie on the ocean floor. And so we don't have to go digging or tunneling, and we can engineer to minimize the impact. And if you allow, I love to play this short video of something that we've just wrapped up in the recent days.

Absolutely. [Presentation]

So you're using high-pressure air to get these nodules off the floor and up through this 4-kilometer riser to the surface. Is that correct? It's not -- it's not really mining. It's almost like a Roomba vacuuming just at an industrial scale.

That's right. Yes. We use compressed air for the lifting and then we have an electric vehicle on the seafloor that uses a hydraulic system to -- and it's an engineering principle known as the Coanda effect. And we essentially -- we fire a jet, which -- of water, which, as it hits the nodule and the collector head moves away, it lifts the nodule. And that allows us to minimize the impact that we're able to make. And so here's a little video that is courtesy of one of our fellow contractors who are out testing their machine. And if you look closely, you can see how -- and the principle is the same on ours. The nodules are actually lifted from the sea floor as opposed to going down there to churn. And on the next slide, you can see what was left afterwards, which is basically a pair of tracks. So there's no real impact you can see where we've stopped the machine or they stopped a machine and took a picture. And so of course, what that means, firstly, is that the area can start regenerating straightaway. And while we're on that point, it might be worth noting that people sometimes suggest there's not enough data, environmental studies. But actually, there's an enormous amount of study that's gone on since the 1960s, and we -- some of my team were at a conference in Bergen a few weeks ago where the Polish contractor had released some results of an area that they had disturbed 22 years ago, and they went back 19 years later, and what they found was in the area that they had disturbed, there was a much higher abundance of [NEO], macro and megafauna, so the organisms that you can see in the area that had been disturbed versus the area that had not been disturbed. And so, once again, go to do the science to provide you the answers to these questions. So...

Absolutely. Well, part of your trial, which you recently completed, and you've had some big milestones in the last year, including in the last two months, both for offshore and onshore parts of your operations or the scale-up that you're preparing for. So there is going to be a lot more data, scientific data available as the scientific vessels that accompany yours collects their data, and I think you're collecting it through the end of the year before everything is said and done. So from -- leaving aside the environmental impact, just from sort of the execution of the trial that you run of this pilot project that you run, would you say that the technology part of your operation is pretty much derisked at this point, and you have what you need to go forward with your Project Zero, which is the initial sort of production goal that you have in mind?

100%. We completed the onshore part of that derisking last year. And this year was focused on the ocean component. And you've heard us talk about Allseas. They're one of our major investors and our partner. And one of our strategies was to bring in subject matter experts. Allseas have been operating in the deep ocean environment, laying pipe for the oil and gas industry and also decommissioning oil platforms for the past 37 years. And so they were able to bring the best out of their team to be working on this project. And the excitement within that organization about this project is at an all-time high. I'm here with some of the team that are part of the crew change that will relieve the crew on the hidden gem later today. And they know how to get this stuff done. And for, of course, yes, it was about testing the system, but this system worked 50 years ago as well. And so I don't think we had major concerns around that, but there are things to test, right, because you need to prepare for a production level. And so a big part of this test was the environmental monitoring. And as we reported yesterday, we were very pleased with the data we've gathered. We were successful at meeting all of our objectives there. And now, of course, we're just looking forward to being able to get that into a form that we can share it with the marketplace.

Yes. And I think it's probably worth comparing to where this project would be if were on land, and there are a few attributes that are pretty unique in terms of that derisking. Certainly, we did we -- all the team at Allseas at NORI sustained production rate of 86 tons per hour. That will go up north of 200 tons per hour as the Project Zero system is upgraded and optimized, you have a wider diameter riser pipe, more collector heads, a lot of other things. But it's the type of work that for any project on land, for example, there are always some learnings and some optimizations. Realistically, here, one of the great things about it is that we're using existing assets for the most part. The hidden gem vessel, it's the same $10,000 vessel that it was a new build over a decade ago that it cost about $750 million. And Allseas went out and bought this for the purposes of Project Zero at a price tag of less than $50 million. So the great thing about this industry is you can ramp up in a very capital-light approach and take existing assets that, maybe in the next coming decades, wouldn't have as much to do in the offshore oil and gas space and repurpose them to collect nodules. And that also allows us to ramp up in a pretty capital-light manner. So again, when you might be doing a similar project on land, once you get the permit, you might then have to say, "great, time to go build out all the infrastructure and the port, power, water, rail, local community support." Here, once we get the permit, the hidden gem goes out, and we think we could be operating commercially within 90 days after that. So the infrastructure we can basically take the nodules as we collect them and go to where the infrastructure already exists. And that capital-light model is a major advantage from this industry.

Absolutely sounds like it. So, Craig, perhaps this is a good time to talk about sort of the economics of the project. How valuable do you think your contracts might be, obviously, starting with NORI and perhaps even NORI-D specifically. And you mentioned this capital-light approach, what does that really mean? I mean, when do the decision points have to come, what -- which parts of the ramp-up will be or could be capital light versus the parts where you're going to have to invest a lot of CapEx to get things off the ground?

Yes, absolutely. So to that point, I'll share this valuation slide, which we use on most of our quarterly reports. So when we're thinking about valuation, it is appropriate to look at one contract and the other. NORI-D is the area where we've done the most work. We've invested already over $250 million. So frankly, I would say just the cash that we've put in and those valuable learnings, and we're the only contractor with Canadian and SEC compliant resource statements. So the value intrinsically of the contract, I would say, is already far above our current market cap. But thinking about what the value of the metal is within the NORI-D, 22% of our resource, AMC Consultants actually built this model, and this is available on our website, suggesting that, today -- and this was using metal prices that are approximately two years old at this point. Today, the net present value of NORI-D would be just under $7 billion. If you did the exact same NPV math today and just updated for current metal prices, which I understand there will be inflation on the cost side, too, versus two years ago, but apples-to-apples with current metal prices, that NPV would be nearly $16 billion today. And again, that's just 22% of our resource. But the capital-light approach is part of this analysis as well or it's worth mentioning, this was actually taking some conservative assumptions, which said, to get this level of production on NORI-D, you would need approximately $7 billion of development CapEx. But that wasn't assuming that we take vessels like the Hidden Gem and continue to convert them at a relatively low cost. It also assumed that TMC was potentially building vessels from scratch and it's never our intention or plan to actually own a vessel that just wouldn't be the type of business we want to be in. We control the resource. We're developing the resource. We do the definition work, the environmental work, permitting work, but then it makes a lot of sense to rely on our partners with deep pockets and large balance sheets to help scale up and bring the assets to actually deliver that production. The vast majority of the CapEx for Project One, which is our full-scale steady state production, the vast majority of the CapEx, nearly $5 billion assumed was for onshore processing facilities. And some of that's the pyrometallurgical facilities, that's approximately $2.8 billion, and then approximately $2 billion for refining. Well, we've talked -- we've spoke with some customers who would be perfectly fine taking an intermediate product that doesn't have to be refined, and they can refine it to battery metal products themselves. That's the way you could save that $2 billion of CapEx. And in terms of the pyrometallurgical step, well, there are a lot of other potential RKEF lines around the world that we could use and set up a tolling arrangement where, instead of building these facilities from scratch, we could just do a tolling arrangement, and therefore, you're effectively trading CapEx for OpEx. So at the end of the day, we're looking at a margin here that's going to be very strong for the resource sector. AMC Consultants said north of 60%. Are we willing to trade some points of that margin to reduce our CapEx build for what could be $7 billion in that model to something under $1 billion? We absolutely think there's a path to do it, and that capital light approach is likely the way that we'll take.

Sounds good. Craig, thank you for that explanation. So you mentioned you guys a small company, relatively small company sitting on top of what could be the largest unexplored reserve of metal in the world, looking to exploit that metal for that reserve. Obviously, you've already mentioned that you're working with some partners for larger, more established companies. Can you provide us with a little bit more granularity on who those partners are, what your -- what it is that you're working with them on?

If I may, Dmitry, fully explored, but underdeveloped.

Yes.

So yes. So -- and as you know, NORI and TOML have been ranked the largest and the second largest undeveloped nickel projects on the planet recently by mining.com. So we already have some great partnerships. If you look at how we got here, we had Glencore as an early supporter. We had Maersk work with us for our offshore campaigns. We worked with Hatch and other people with regards to the onshore processing to develop a zero waste flow sheet. And more recently, since 2019, we've been working with Allseas who've delivered us our pilot harvesting system. So already, we have some great names there. And there are -- there are one or two names that we're getting very close to announcing more news about. But I think what we tried to communicate to the market yesterday is that there's a very conventional path for a company like us to develop assets like this. It's through the earn-in, farm-in type structure because it allows bigger companies, and when I say bigger, they could be sovereign wealth funds, they could be oil and gas companies, they could be mining companies who want to get some exposure where we want to keep the value so we don't want to give away much of the project, but they get to put their -- put some money on the table to get an earned-in interest. And of course, what is apparent is that most of the money we spend at TMC is on the NORI project. And so we're very confident that we'll have -- or we already have a number of large corporations and funds at the table now. And we're very confident that we'll be able to secure one of them into the right earn-in partner. It's complex because some people are like, "we'll give you the money, but we want you to build in our jurisdiction." Yes, we're not so keen on that. We really -- we're very enamored with the goal of building our first full-scale processing plant in the U.S.A. I think that I'm enamored with the idea that you can buy an American-made car with an American-made battery by American labor with American raw materials, there's only one way you can do that, and that's with us. And so I think that has great appeal. And so we continue to talk to those parties. And of course, the news we released yesterday is very helpful when it comes to derisking because some of those companies have no experience in the deep ocean. They're more experienced onshore. And so knowing that we have the quality partnerships in place allows them to go, "okay, so you've got that sort of, now look at regulatory, now look at onshore," which they might understand a lot about. So you can expect some news coming around that. And that's how we plan to better manage the capital structure for TMC shareholders as well. Because as Craig just showed, there's around $16 billion of net present value in the NORI asset, and that's only 22% of our defined resource, yet the company is worth less than $300 million. And so we really don't want to be issuing more equity in the top curve. We want to focus on getting those partnerships. And so we're very aligned with all of our stakeholders and shareholders, of course. The management team all vested in the equity. We protect the equity, and we run the company as tightly as we possibly can so as we preserve that equity.

That sounds good, Gerard. Let's address sort of the elephant in the room here in the last couple of minutes we have left. The environmental concerns. Rightly or wrongly, there seems to be a loud opposition both from environmental groups and coming out of the ISA meeting held recently in Jamaica, even some country governments are starting to sound off about perhaps putting a moratorium on exploration or exploitation until more scientific data becomes available. What is your take on all of this? I mean, it's -- obviously, it's beyond your control. But as you look at this as an engaged and obviously involved entity, how do you see this playing out over the next year as ISA gets ready to release their final regulations on exploitation of undersea resources?

Two things. There is no legal basis for a moratorium. So we're not worried about that. For those countries, there's only been one suggesting we should ban, that's -- we're not worried about that either because the Convention on the Law of the Sea, an international legally binding convention on all the parties have signed it mandates the International Seabed Authority and its council to put in place exploration and exploitation regulations. The exploration rigs were done back in 2000. And so that's all done. But they are mandated. It's not a negotiable thing. They have to work earnestly to put in place that regulatory environment to allow this resource to be developed. So now let me go back to the concern from environmentalists. The irony is, we approach this with the same concerns. We want to protect the oceans as well. But of course, the biggest risk to the oceans are global warming and that resulting in acidification. And so to do that, we need to reduce CO2 emissions. We also need to protect biodiversity. And of course, 97% of biodiversity is on land. And so we're pushing now into these very pristine biodiverse ecosystems because underneath these rainforests exists all of these battery metals. And so it's a real conundrum, and that's why I think we need to encourage people to really take a planetary approach. We can't protect the CCZ while we destroy pristine biodiverse carbon sinks to get these battery metals. It just makes no sense. And so our approach has been just stay focused, complete the science, and then publish the results. And I think while that -- while we've been doing that, of course, some other things have helped us. The geopolitics at the moment, have made people think security of supply is really important. We need to secure jobs, and we need to make sure we have a lesser dependence on China and Russia. And how do you do that? You can't just conjure up a metal deposit, yet here we have one off the coast of California, admittedly 1,000 miles off the coast that could make the U.S.A. metal independent. And that's a once in a lifetime, once in a multigenerational opportunity because if America doesn't seize this opportunity or the West doesn't, we know our partners or our neighbors in Asia will. There's no doubt about that.

Absolutely makes sense. Okay. So, in conclusion, I would just like to perhaps circle back to assuming everything goes according to plan in terms of ISA issuing their regulations in the second -- or early in the second half of 2023. What are sort of the time line? You mentioned that you can be ready to go within three months of getting an exploitation contract, but if you can kind of walk through the time line from now until production expectations and what are some of the milestones that investors may be looking for as catalysts for the stock in the months and quarters ahead?

Well, you can assume behind the scenes, our new project director is going to make sure that we're covering off all the project risks. So we can assume that's underway, and we'll be working with our partners. The good news is, the good news is we already have our first production vessel, and that's the hidden gem. It's been out there collecting at a small scale, but with some small adjustments, it will be ready for what we call Project Zero. The other bit of good news on the processing side is there are existing processing facilities where we can send our nodules. And so when I talk about building a plant in the U.S., that won't be for Project Zero, that will be for a bigger production scale. So that means that takes a bit of risk out of the equation as well. The team and I are busy working with strategic partners, and we're spending a lot of time in the Middle East. I'm off to Korea at the end of this month. We're talking to people about that earn-in type arrangement because we know that as we start to publish this environmental data, as we start to put people's mind at ease around the environmental side, the metal shortages will just become more obvious and more extreme. And so I think what we will be able to -- investors can look forward to, and I can't tell them when precisely, that you could wake up one day and find that we've done that deal. And that would rerate the stock. People often say to me, do you think you could wake up one day and the stock has a zero or two zeros on it? It's like sure. I mean when you've got a resource that's as good and as valuable as the one we have, and there's a total disjoint between the valuation and what its potential valuation is, then eventually that's going to be red. And -- but we just need to focus on the project deliverables. And that's what we've been doing since -- in the last years, and it's worked very well. We haven't missed a beat. Despite the fact that we've had a declining and a disappointing stock price, we have not missed a beat on the project. And that's a credit to the team that are working on this project. And as Grant indicated, their commitment and dedication to this mission is 10 out of 10.

One last comment on that, too, Dmitry. It feels like this is a coil, it's a spring that keeps on getting tighter and tighter. And we talk about how a lot of these milestones hitting these similar project milestones on land, one would see you marching closer to that fundamental NPV, and people just aren't paying attention yet. So what we can do is control what we control and keep on hitting the milestones and be smart about our cash balance, be smart about our capital structure because the underlying need for this metal and the underlying asset value that we're developing is only going to keep increasing. So whether that's a deal, whether that's a finalization of the exploitation code, there will be a moment where people wake up and start valuing it fundamentally as opposed to how they're looking at it today.

Makes total sense, Craig. Well, thank you, gentlemen. I think we've covered a lot of ground here and giving people a lot of food for thought. I'm sure that we'll be talking again. So thank you for joining us today. And I hope the listeners have enjoyed this presentation I certainly have, and I look forward to hearing more from you in the future.

Thanks, Dmitry.

Thank you, Dmitry.

Thank you.

Bye-bye.