TMC the metals company - Q1 2023

Transcript

Operator (participant)

Good day. Thank you for standing by. Welcome to The Metals Company First Quarter 2023 corporate update conference call. At this time, all participants are on a listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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 Sheskey. Please proceed.

Craig Sheskey (CFO)

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 may be 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 10-Q for the quarter ended March 31st, 2023. All that 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.

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 of these non-GAAP measures can be found on our slide deck. The slide deck is available on our website at investors.metals.co. I'd now like to turn it over to our chairman and CEO, Gerard Barron. Gerry, please go ahead.

Gerard Barron (Chairman and CEO)

Thank you. Excuse me. Thank you, Craig. Good afternoon, and thank you all for joining us today for our first quarter 2023 corporate update call. You're welcome to follow along with our slide deck, or if you're joining us by phone, you can access it all anytime at investors.metals.com. It's only been about six weeks since our last update call. The first quarter has set an exciting tone for 2023. With progress at the International Seabed Authority generating headlines around the world, 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, 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, we believe LCR management continues to show signs of that potential.

In March 2023, LCR acquired additional royalties on MG 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 Sinú-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. LCR's corporate presentation cites a pipeline of term sheets and opportunities with over $200 million of net asset value in their estimation. Please head to lowcarbonroyalties.com for more information. Onto 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 intersessional work that is happening in between. It is important to note that all member states are working diligently with the ISA Secretariat and observers to get this innovative regulatory regime in place.

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, 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, 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 acknowledgement 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.

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. 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 Code is 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. 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 operations with an exploitation contract granted under the final Mining Code.

We reserve our legal rights under UNCLOS to lodge an exploitation application before the Mining Code is adopted. We look forward to continued progress at the upcoming July meeting and through the ongoing intersessional 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 for countries and companies with industrial credibility, including Transocean's announcement of providing a Samsung 10000 drillship for conversion into a nodule production vessel ahead of Belgian contractor GSR's integrated system test currently scheduled for 2025.

I spent time last week in Houston at the Offshore Technology Conference, 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. While interest continues to grow in the potential for seabed minerals to reduce the West's reliance upon 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. A Chinese official interviewed in the article noted TMC's leadership position in the industry.

China currently holds three exploration licenses for polymetallic nodules. In February, China Ocean Mineral Resources Research and Development Association, or COMRA as we know them, signed a 2nd contract extension for polymetallic nodule exploration, granted on the basis that it will be in a position to proceed to exploitation within five years. Onto our value proposition. The scale of our nodule resource is enormous. Each little car on this page represent the metal required to electrify 1 million vehicles with a 75 kWh 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 U.S. passenger fleet. Earlier this month, Mining.com released their updated 2023 rankings of the world's largest undeveloped nickel projects.

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. You'll notice several Canadian projects in the mix. This is where focusing on nickel-equivalent grades is so important compared on the bottom of this page. On land, for both nickel and copper, grades have declined over time, which is significant for several reasons. It means more ore is moved to get the same amount of metal, and it often negatively impacts the economics for producers requiring higher prices to green light new projects. It requires more land use, more energy use, and more water use. 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. This grade differential between TMC's projects and the world's other undeveloped nickel projects is highlighted on the y-axis of this bar chart. TMC is an outlier among peers with the largest nickel-equivalent resource and the highest nickel-equivalent grade. This grade differential is the key attribute which affects our future estimated margins, our NPV, 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. Onto 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. 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. 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. This flow sheet would produce near zero solid waste using almost all of the nodule's mass while producing zero tailings. 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. 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 a manganese silicate product. With relatively straightforward scope, the alloy can be upgraded to matte, which is a conventional intermediate product with concentrated nickel, copper and cobalt.

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 produce the battery metals on the right side of this page. Near zero waste and no tailings is possible because the manganese silicate product contains most of the mass of the nodules, so there just isn't a lot left over. A byproduct aggregate, fayalite slag material, is produced with the remaining non-saleable portions. The nodules also contain naturally lower levels of certain toxic elements, which often require more difficult waste and tailings management on land. Fayalite slag is used commonly as road aggregate or other products all around the world today.

The nickel copper cobalt alloy and the manganese silicate products are the first possible saleable materials. This is our initial plan with Pacific Metals of Japan or PAMCO. In March, we announced that we had signed a non-binding 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 tons were lifted up the 4.3 km riser system to the Hidden Gem vessel. As historic as it was to see those first nodules up the pipe, perhaps the most important takeaway from these trials was the wealth of data gathered on the environmental impacts of nodule collection. Let me share some more detailed information 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 TB 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 Deep Data platform. Once fully collated and categorized, we expect that the deep sea 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.

Bryan O'Malley (Marine Science Researcher and Academic)

I'm Bryan O'Malley from Eckerd College in St. Pete, Florida. I'm a benthic ecologist, and I'm here on campaign seven A, leading the work scopes of environmental DNA and benthic foraminifera. Here on seven A, we're setting ecological baselines of environmental health of the benthic environment, which means the sea floor and all of the biological communities that live on the sea floor. For our first work scope, we're sifting through this deep sea sediment for these tiny armored amoebas called benthic foraminifera. They're the most ubiquitous organisms down in these deep sea abyssal plain regions. They're very good bioindicators for ecological health because they form the basis of the food web, along with bacteria and organic matter. They will be important to monitor before and after this collector test. Our second work scope is environmental DNA or eDNA. Organisms are constantly shedding their DNA into the environment.

This all gets entrained in the sediment. We can actually sequence it and get an idea of the entire community. We will then compare it to our post collector test sampling and see how this has changed over time. I really hope that this research will set a precedent among any future industries relating to the blue economy of setting environmental baselines and monitoring impact responsibly.

Gerard Barron (Chairman and CEO)

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. This is particularly true with regard to sediment plumes, which have previously been the topic of much hyperbole and speculation. Leading experts in the field of deep sea sediment plume dynamics, including a team led by Professor Tom Peacock at MIT, as well as researchers at Scripps, found that 92%-98% of sediment disturbed during the offshore system trials conducted by fellow contractor GSR remained within 2 m of the sea floor. 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.

On our own grounds 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. Here's a glimpse of this work in this short video.

Andy Banks (Data Scientist and Modeler)

My name's Andy Banks. I work for a company called DHI Water and Environment. We specialize in building numerical simulations of what we call water environments. It's the ocean, it's the rivers, the estuaries, mines, primarily from a decision support capacity. We have considerable domain expertise in plume monitoring. The pilot collector vehicle is scooping a good bit of sediment up off the seabed, and it's generating a plume. From a technical standpoint, we believe that a lot of these principles that we use to monitor and quantify the fate and transport of suspended sediment can be applied here in the deep sea.

Speaker 8

Our main purpose has been to supply the data collection devices and sensors for DHI so that they can understand and plan where they need to put the sensors. They can capture the data from the collector vehicle. We put water quality data sensors, so CTDs, they've got transmissometers, they've got turbidity sensors, they have DO sensors, ADCPs, that's for collecting the currents, getting the current data. We've got some camera landers on the sea floor. We've got some other mid-water moorings that we can talk to. We can query those real time with modems, conductivity, temperature, depth, salinity, all those types of oceanographic water quality sensors.

Andy Banks (Data Scientist and Modeler)

At the present moment, we have an array of fixed assets that are sitting in the seafloor. These are instruments that measure the amount of suspended sediment in the water using acoustic and optical backscatter. We'll also have similar instrumentation sitting on an ROV and some AUVs that fly around and try to reconstruct a three-dimensional picture of the plume. After the project, we'll take all this information that's been collected and integrate them to build a numerical model that describes the transport of suspended sediment and ultimately its fate. In other words, where it lands and how deep it settles. More broadly, that feeds into the environmental impact assessment that TMC is putting together for the project.

The interesting part about this project to me is that we're working with high-tech machines, working on a complex problem at 4,200 m depth. There's, you know, it's a serious technical and logistical challenge. Try to take a picture of this, you know, three-dimensional complex plume, basically at a distance, trying to do something that very few, if anybody, has ever done before. It's quite exciting.

Gerard Barron (Chairman and CEO)

Recently we released the results of a comparative life cycle assessment done by Benchmark on the NORI-D project and key land-based routes for getting nickel, cobalt, and copper. For nickel, the NORI-D project outperforms all terrestrial routes in 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 rainforest nickel. This slide provides a visual comparison of nickel from the NORI-D as compared to nickel from Indonesian laterites processed via RKEF and HPAL routes. The impacts for NORI-D are probably hard to see on your screen, represented by a tiny blue line.

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 Benchmark's 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 pre-preview those results, the gap between nodules and conventional sources is even greater when sequestered carbon and carbon sinks are considered. While carbon is immediately released into the atmosphere when woodland forests are churned up in the DRC or rainforests 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 it's far offshore and away from any human communities. That means the key social challenges that terrestrial mining faces, such as human displacement, child or forced labor, fresh water usage, and exposure to toxic elements, do not exist when collecting nodules. Further, UNCLOS 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, Odunton, in a speech 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." This is exactly what happened in the case of Nauru and Tonga.

He goes on to note, however, that this wouldn't have been possible without sufficient confidence in the regulatory system from the private sector. 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 receive administrative and other fees, 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. I'd now like to turn it over to our CFO, Craig Sheskey, to discuss valuation and financials.

Craig Sheskey (CFO)

Thanks, Gerard. We'll start with a familiar slide. In March 2021, AMC Consultants issued a SEC Reg S-K 1300 compliant initial assessments of the project economics for the NORI-D area. 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. This NORI initial assessment is available in the investors section of our website, and the NORI Area D financial model can be found beginning on page 310 of that document. 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.metals.com.

Of course, running the same model 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. Let's talk a little bit about how these underlying project economics can and eventually should translate into valuation. This slide 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. Using the NPV of NORI-D alone, we found that we traded at a discount of roughly 20x. This slide, put together with the help of Stifel, looks at land-based nickel developers instead. Again, the story remains the same.

NORI-D is trading at a 20xs 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. There's also significant regulatory uncertainty on land as well, including for some of the names on this page. If you just cut through all the noise and narratives, the resource is the resource. With TMC, you have an opportunity to invest in the largest nickel resource in the world at 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.

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 undervalue situation, including, of course, continued progress from the ISA, which Gerard discussed at length, NORI submitting an exploitation application over the NORI-D area, the ISA granting an exploitation contract over NORI-D, and then of course, the beginning of commercial production shortly thereafter. Onto our financial results. TMC reported net income of approximately zero for the quarter ended March 31, 2023, compared to a net loss of $21.1 million or $0.09 per share for the quarter ended March 31, 2022. The first quarter 2023 results include a gain of approximately $14 million on the sale of that 2% royalty on the NORI asset to Low Carbon Royalties.

Exploration evaluation expenses during the quarter ended March 31, 2023 were $7.2 million compared to $7.4 million for the quarter ended March 31, 2022. General and administrative expenses were $6.2 million for the quarter ended March 31, 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 vesting 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. We believe that our cash on hand and borrowing availability under a recently signed credit facility with an affiliate of Allseas will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months from today. I'll now turn it back over to Gerard for some closing remarks, before we take Q&A from the audience.

Gerard Barron (Chairman and CEO)

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, Allseas and NORI announced a major offshore collection achievements, lifting over 3,000 tons of nodules 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, also announced additional flexibility on the financing front, including the $25 million unsecured credit facility provided by our partner, Allseas. 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 for 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.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered and you wish to move yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. One moment for our first question. Our first question comes from Dmitry Silversteyn with Water Tower Research.

Dmitry Silversteyn (Senior Research Analyst)

Good afternoon, gentlemen. Thank you for taking my call. Congratulations on coming up with a break-even quarter here. I understand there were some one-time items there, but still, it's good to see you guys controlling your expenses and, you know, 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% back to LPR?

Craig Sheskey (CFO)

No, no. What happened, Dmitry, was, you know, effectively there have been additional transactions subsequent to the deal announcement in February. There were additional shares issued, which resulted in the acquisition of very valuable natural gas resources in Latin America. We noted that the Maria Conchita royalty, which other than our NORI contribution, a 2% gross overriding royalty, the Maria Conchita royalty actually doubled in size due to the subsequent transaction. And then there was an additional natural gas field acquired, the Sinú-9 asset, owned by NG Energy. With those two transactions, you significantly increase the value of the natural gas elements of that portfolio, yet TMC's stake was reduced from just 35%-32%. We think it represents a material increase in the valuation prospects of that entity.

Dmitry Silversteyn (Senior Research Analyst)

Okay. You have a lower percentage of the company, but a higher royalty revenue run rate anyway?

Craig Sheskey (CFO)

That's correct.

Dmitry Silversteyn (Senior Research Analyst)

Okay. Secondly, let's switch to the PAMCO project that you're working on. Can you update us on how they're doing with your samples and where they are in determining the feasibility of processing your polymetallic nodules? What would be the next step and how long would that take for them to figure out if they wanna, you know, if they can do the alloy plus manganese or if they can take it down to matte or even further?

Gerard Barron (Chairman and CEO)

Yeah. Hi, Dmitry. Thank you for your question. Look, it's worth noting that PAMCO have been processing nickel ores since 1965. They are a very credible partner. Of course, their flow sheet, which they use to currently process materials, nickel laterites, is identical to what we've been piloting. What we developed with Hatch involves a rotary kiln and electric arc furnace. They know a lot about this. Of course, we've been working with them for some time.

Dmitry Silversteyn (Senior Research Analyst)

That's very helpful. I appreciate that, Gerard. That actually leads me into my next question. You provided a very nice flow diagram of going from nodules to the finished product.

If you look at every step, you mentioned, you know, alloy and manganese silicate as the first step, and then the converter slag as the next sort of upgrading step, and then finally getting to the, you know, to the copper, nickel and cobalt salts, and the ammonium sulfate, which is actually a great solution for your waste and tailings. You know, you talked about sort of the payables that you can get at each of those steps. Is. Can you give us an idea, you know, without talking about specific, you know, dollar amounts, but maybe in percentage terms of, you know, copper, nickel, cobalt, ammonium sulfate being 100% and, you know, alloy and manganese being, you know, X%, and sort of what does each of these steps mean for you in terms of value realization for the nodules?

Gerard Barron (Chairman and CEO)

Sure. Sure. Well, the manganese silicate. The manganese silicate will get 100% of the value there. In fact, we had an independent company do a value in use report, which showed that we should get a premium, and we've handed samples of that to many people in the market and they love the product.

They love it because our process takes a lot of the iron out of the material, and that makes it a much more friendlier material to use in the steelmaking process. As for the alloy, we're confident we can get between 65% and 70% of the payables, and if we go all the way up to matte, it depends on the market. We might get 85%, we might get 90% of the payables.

Dmitry Silversteyn (Senior Research Analyst)

Okay. Okay. That's a lot better mathematics than I, than I envisioned going from step to step. Okay. That actually leads me well into my, into my last question. When you talk about NPV of $13 billion for the NORI-D project, that includes, if I understand correctly, about $7 billion in CapEx that you would anticipate spending to getting the project fully developed if you were funding it internally. You've pretty much secured the offshore portion of the process and turned that into operating expense versus capital expense with your, with your Allseas contract. It, you know, PAMCO may allow you to do the same thing onshore.

When you really talk about NPV, are we really talking about something closer to maybe like $17 billion-$18 billion, assuming that you have to put in $2 billion-$3 billion of your own CapEx?

Craig Sheskey (CFO)

Well, yes, no, it's a good question. You know, we've been very careful not to sort of update every number on that slide, given the fact that, you know, for putting out something as definitive as an initial assessment, and, you know, we're very eager to, you know, share some of the new project economics as we move past our pre-feasibility work this year. You know, we want to make sure that we're not getting out over our skis until we've had sort of third-party independent assessments done by qualified persons. However, what we've shown on that page is just for the most simple sensitivity of do not make those changes for CapEx as you noted, but also don't change OpEx, just change the metal prices. That's what the sensitivity in the model shows.

Importantly, we haven't said, you know, what could that $7 billion of CapEx go down to? It could be quite a bit lower than $2 billion or $3 billion. That would likely entail, however, you know, additional amounts paid in terms of operating expenses. We have this great option in front of us to be able to enhance return on equity for our shareholders by reducing CapEx in exchange for OpEx. Does that mean you would be achieving 60%-70% EBITDA margins? No, that would be something smaller. You would still have a very, very healthy EBITDA margin, very strong positive Free Cash Flow, and doing it in a way that minimizes CapEx. We don't want to get too specific on that.

you know, I would also make another comment to Gerard's point on whether we sell alloy or matte or, let's say, take it all the way to the battery-grade products. On average, our basket of metals is 30% higher than it was at the time of that initial assessment. At the time of that initial assessment, even when producing nickel sulfate and cobalt sulfate, post what was at the time an expected $2 billion of CapEx for the refining work, building a facility from scratch. In that scenario, you would be getting roughly $503 per ton of revenue. We're quite confident that we'll be quite a bit above that number, even stopping at, call it an intermediate matte product for, you know, nickel and cobalt, for example.

We have a nice tail when it comes to higher metal prices that allows us that flexibility to make these considerations about trading CapEx for OpEx while getting the production to very capital light.

Dmitry Silversteyn (Senior Research Analyst)

Thank you, Craig. That was helpful. Final question, just to tie it all up together. You know, one of the biggest outstanding issues is the financing that you need to get you there. I understand that the deal with PAMCO may have gotten you into sort of conversations with maybe some new potential partners. Can you provide any update on how that's going and sort of what your expectations are for getting either project-level financing or some other debt financing to allow you to bring this project to conclusion?

Gerard Barron (Chairman and CEO)

Yeah, sure. Look, we have stated, several times in recent updates that we remain focused on asset-level financing. You know, it's interesting what's happened to our equity value since being a public company. It hasn't been a very impressive chart. At the same time, our underlying assets, as you've seen on NORI-D, have doubled in value almost. It's hard to reconcile that. Now, the good news is, as we've shown through recent financings, including the $30 million that largely came from existing shareholders in August 2022, and most recently from our largest investor, Allseas, the $25 million we announced recently. The current shareholders are prepared to keep supporting this company. That's good. We know this project is transformational in some of those metals. We know that because of the size and quality of it.

As we get closer to removing some of the uncertainty, and the uncertainty involves the permitting, of course, and being able to demonstrate those environmental impacts. The fact that we can, you know, produce reports such as the one that Benchmark produced and the other peer-reviewed papers that are coming out are good indicators. I think as we get closer to those certainty points, those strategics that we continue to talk to, you know, it makes it easier and easier to get them involved. You know, one of the tremendous things about this project is we're not talking about billions of dollars. We already have our first production vessel, which Allseas own, the Hidden Gem. We've identified a processing partner that can get us processing these nodules for no CapEx. So we're not talking about large sums of capital.

You know, I can't say more than the fact that these talks are going well. We're pleased. Craig can talk more about the regular approaches we get from financings. We have an at-the-market facility of $30 million. We have a shelf registered of $100 million. You'll note we haven't used them. That tells you we're very confident about the other steps that we have, the other paths that we're moving down.

Dmitry Silversteyn (Senior Research Analyst)

Okay. I understand, Gerard. Thank you very much. I appreciate the call.

Gerard Barron (Chairman and CEO)

Thanks, Dmitry.

Craig Sheskey (CFO)

Thanks, Dmitry.

Operator (participant)

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

Malcolm McDonald (Equity Research Analyst)

Hey, guys.

Craig Sheskey (CFO)

Hi, Malcolm.

Gerard Barron (Chairman and CEO)

Hey, Malcolm.

Malcolm McDonald (Equity Research Analyst)

Dmitry just asked a lot of the questions, but, just regarding the relationship with Maersk, can you provide some background on how or why the relationship with Maersk was initially established? Why they have been selling their position and kind of what their intention is for the future, you know, going forward with their remaining shares. This has obviously been an overhang, you know, on the tape. Any color or clarity that you could provide there would be very, very helpful. Thank you.

Craig Sheskey (CFO)

Yeah, look, going back to Maersk as a partner, they've been extremely instrumental in a lot of our resource definition campaigns. As Gerard mentioned, we've had, you know, 17, on NORI alone, resource definition and environmental campaigns, most of which were made possible by the Maersk Launcher vessel. They've been an incredible partner. They were very happy and eager to take equity in DeepGreen and then TMC, of course, for some of that compensation for being such a great partner. That partnership ended at the end of 2021, this was really a natural progression given that a lot of the resource definition work had been completed. The environmental baseline campaigns had largely been completed. Of course, those continue and the analysis of that data continues.

Really, we're moving away from that exploration pure part of the phase to now pilot mining. You know, having Allseas carry more of that water, and especially using the Hidden Gem vessel, which would be our first commercial production vessel on Project Zero, was a very natural transition. During that time, there were some changes at Maersk structurally, where, you know, this business was held in Maersk Supply Services, which was, you know, deemed the, quote, "other", element of their business. This was really, I think after the point that, you know, the partnership ended, it was kind of a non-core business in what was a non-core segment. Then finally, news came out earlier this year that Maersk Supply Services was sold to the parent holding company.

In our view, this is not any sort of economic decision or anything that impugns, you know, the view of deep sea mining overall. Certainly we continue to have a great relationship with those guys on a personal level. You're right. You can see from their filings that they've been selling quite a bit in the open market since the fourth quarter, going from roughly 21 million shares to a small fraction of that. Look, it's been frustrating, frankly, to know that that overhang is out there and to see a lot of this good news that's been coming out over the past few months, including really going back to the collector test last year.

If you would have told us that, after doing this massive historic collector test, the first of its kind in integrated test systems since the 1970s, effectively de-risking many elements of this technology. Of course, none of that has shown any credit yet in the TMC share price. Again, we think this is a spring that keeps getting coiled tighter and tighter as a lot of this good news has come out. I think that overhang, while it's been difficult, we're not too far away from that being behind us and can start realizing the potential of this massive resource.

Malcolm McDonald (Equity Research Analyst)

Thank you very much.

Operator (participant)

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

Frank Jones (Investment Analyst)

Craig, Gerard, thanks for the time. Thanks for the call. Awesome update so far. I think Dmitry and Malcolm asked every question I had, except we haven't talked much about offtake agreements. I know the PAMCO MoU probably comes first to kind of understanding what products you're gonna sell on the market. Do you guys have given any thought to what you're going to do or how you're gonna sell, whether it be the alloy or the matte, if it'll be like an at the market process or if you're looking to find an off taker before this gets going on other projects here?

Gerard Barron (Chairman and CEO)

Yes. Hi, Frank. What I can say is watch this space. Watch this space.

Frank Jones (Investment Analyst)

Okay.

Gerard Barron (Chairman and CEO)

We see it as an important part of the future financing strategy. You know, we're talking to strategics at an asset level, and that also includes talks around offtake. You know, those metals are all in high demand and, you know, we're working hard on it. You know, hopefully we'll have some good news around that before the end of the year.

Frank Jones (Investment Analyst)

Awesome. Thank you.

Operator (participant)

I'm not showing any further questions on the phone lines.

Craig Sheskey (CFO)

We might take a few from the web chat. I see from Steve Clarke, he asks, the U.S., because of inaction by the U.S. Senate, is not a party to UNCLOS and only has observer status at the ISA meetings. The U.S. does have an outside influence in terms of the need for battery minerals. They seem to be playing both sides of the debates on quickly passing RRPs and exploitation licenses. How do you see the U.S. role in proceedings this July? Well, it's a good question, Steve. I think overall, you know, their role as observer will continue. The U.S. does respect, you know, UNCLOS and the ISA mandate over the high seas. The U.S., of course, funds a lot of the ISA operations, along with many of the other member states.

You're absolutely right. Look, a lot of the demand for these metals is coming from the United States, which, if you're looking at nickel, manganese, and cobalt, the U.S. effectively has zero or de minimis primary production of all three of those. I think on one hand, while the U.S. may not rise above observer status anytime soon and may not be much of an active participant in the debate and actually getting these final rules and regulations as part of the Mining Code, you know, to the finish line, the U.S. does certainly have a need for these metals. You've seen a lot in the Inflation Reduction Act, for example, a potential funding from the U.S. Department of Defense and Department of Energy, which shows that there is a mandate to get primary production of a lot of these metals.

There was a letter from Senator Lisa Murkowski in 2022 to the U.S. Department of Energy wondering why is the U.S. not doing more? Why did the Biden, 100-day supply chain review not focus more on these? The response from Secretary Granholm of the Department of Energy was, "Well, the U.S. is well aware of this." While this topic was beyond the scope of the report, that they were well aware of the potential of nodules. I believe, I'll paraphrase her quote, that eventually the U.S. does expect this will be a significant source of future supply. What we can tell you is that, you know, we spend a lot more time in D.C. than we used to.

Just as Gerard mentioned on the offtake, continue to watch this space as well because we recognize that it is a very important part, if not necessarily for the ISA process, but certainly for the narrative around these battery metals. Andy Whitmore, I appreciate the question there too. We had one on Maersk, I believe we answered that with Malcolm McDonald. Gerard, a question here from David Larcombe from Edison Investment Research. Do we have any update on the recent NORI overflow report and the engineering review of the airlift system required? Perhaps we can talk a little bit about the ISA audit of that. A second question on it, will the PIS impact, or any impact be required before filing any further commercial operations?

Gerard Barron (Chairman and CEO)

Sure. Look, the what I could only describe as a much over-exaggerated event. Of course, you know, the Hidden Gem had about 125 people on it, including many scientists. We had an observer boat with more than 80 people on it, many of them scientists. You know, I heard some people say that, you know, we weren't as transparent, which is total nonsense. You know, we had a procedure in place. As soon as possible, we closed down the system. We made an assessment. We notified the regulator, which basically we found the fix. The fix was, of course, was the transport mechanism, which is water that is used to carry the nodules up the 4.3 km pipe, had a collar on it.

As it turned out, the collar needed to be a little bit taller. Allseas, to their credit, were able to fix that in situ, and it took two days. Of course, the system restarted and no such problems reoccurred. Let's just put this in perspective. You know, we were lifting water and a small amount of sediment and some nodules from the bottom of the seafloor, and some of them spilled off the side of the boat. The material that came out of the ocean went back to the bottom back into the ocean. You know, there was no risk of any serious harm. Of course, that is the purpose of these trials. That's exactly why you do it. There were some learnings to be taken away from it.

You know, there were other things that we learned along the way as well. Of course, you know, we're fortunate to have such a high quality and experienced partner in Allseas who for 37 years have been solving very complex problems in the deep ocean. They operate production vessels laying very important infrastructure pipes for the oil and gas industry, 24 hours a day, 365 days a year on some of their vessels. They're able to identify and fix these issues. No, it was. Of course, there are some learnings of it, and those learnings will be taken into the full production system. I know that the regulator carried out a full review. They sought some external advice to review the review. I think everyone was satisfied.

Craig Sheskey (CFO)

Thanks. We have time for one more question. I think we'll take it from the webcast, unless operator Kevin, if you see any other in the queue, let me know. One from Ryan Boley. Is enhanced worker safety appeal, is it an appeal for the offshore companies that are showing interest in collecting polymetallic nodules? Gerard, would love your perspective on this too, overall, on what are some of the factors that some of these offshore companies, and we're getting increasing headlines about offshore companies looking at this space and devoting resources to it.

Ryan, yes, I think that safety is certainly one, but also it's really an opportunity to repurpose existing assets, but also, you know, devote capital and really devote human capital as well, a lot of the talent within offshore oil and gas that, you know, as we decarbonize as a society over the course of the next few decades, you know, there's obviously going to be exponential growth in metal demand. It's a great opportunity to take existing assets and really talented workers and devote it to, you know, a new space. It's a new space that they know very well. Just like our partner, Allseas, you know, that expertise in operating in, you know, the deep ocean with very low temperatures and very high pressure, it's a unique set of skills.

We're really happy to have that sort of expertise, on display. I know a lot of that was a big theme of the Offshore Technology Conference, in Houston earlier this month.

Gerard Barron (Chairman and CEO)

Thanks.

Craig Sheskey (CFO)

I think that's it for the Q&A. Gerard, I'll turn it back over to you for any closing comments.

Gerard Barron (Chairman and CEO)

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 our 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. We look forward to speaking to all of our shareholders again in August.

Craig Sheskey (CFO)

Thank you all.

Operator (participant)

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