TMC The Metals Co Inc. quarterly report, Q2 FY2023

TMC The Metals Company Inc. — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023; unaudited financial statements, presented in U.S. dollars. TMC is a pre-revenue deep-sea minerals exploration company focused on polymetallic nodules in the Clarion-Clipperton Zone. It has not received an ISA exploitation contract and has no commercial production.

Key financial metrics

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Revenue	$0	$0	$0	$0
Exploration and evaluation expense	$8.1m	$10.2m	$15.3m	$17.7m
General and administrative expense	$5.1m	$8.1m	$11.3m	$16.6m
Net loss	$14.1m	$12.4m	$14.1m	$33.5m
Basic and diluted loss per share	$0.05	$0.05	$0.05	$0.15
Cash used in operating activities	Not separately stated in the financial statements	Not separately stated in the financial statements	$31.9m	$38.1m

At June 30, 2023, cash was $20.0m, current assets were $21.6m, and current liabilities were $18.1m, implying working capital of approximately $3.5m. Total assets were $75.2m; total liabilities were $31.1m; equity was $44.1m.
The filing reports no drawn balance on the $25m unsecured credit facility with an Allseas affiliate. No other outstanding borrowings are identified in the supplied filing text.
Six-month cash used in investing activities was $4.9m of cash provided, largely from the $5m received in the Low Carbon Royalties transaction. Financing activities provided $0.1m.
Operating margins are not meaningful because TMC has no revenue or commercial operations.

Changes versus comparable periods

Q2 net loss increased 14% year over year, despite lower exploration and G&A expenses. A $0.8m charge from the higher fair value of private warrants replaced a $5.7m credit in Q2 2022.
First-half net loss fell 58% year over year, principally reflecting a $13.75m non-cash gain on the NORI royalty contribution to Low Carbon Royalties, lower share-based compensation and lower exploration and G&A costs. The gain is unusual and does not represent recurring operating revenue.
First-half operating cash use declined by $6.3m year over year. Cash nevertheless fell by $26.9m from year-end 2022 to $20.0m, including a $11.3m decrease in accounts payable and accrued liabilities.
Common shares outstanding rose during the period, including 10.85m shares issued to Allseas in February to settle the final $10m pilot-test milestone and related overage charges. Allseas exercised a warrant after quarter-end, resulting in another 11.58m shares issued August 9.

Outlook, funding and material developments

Management expects to submit NORI Area D’s exploitation application after the ISA’s July 2024 meetings. TMC targets first production in Q4 2025, assuming timely approval and successful development; neither approval nor the schedule is assured. The ISA did not finalize its Mining Code by the July 2023 deadline and has outlined a path toward adoption in 2025, potentially earlier.
Management says cash on hand, expected proceeds from the August offering and potential credit-facility availability should cover obligations due within the next 12 months. It also says additional financing will be needed over time. TMC estimates it needs a further $34m–$44m, in addition to June 30 cash and the offering’s expected net proceeds, to prepare the application; this estimate excludes potential facility drawdowns and certain later commercialization costs.
On August 14, 2023, TMC announced a registered direct offering of 13.46m shares and warrants, with expected gross proceeds of $26.9m and expected net proceeds of $25.9m. Investors may also purchase up to an additional $11m of securities subject to specified conditions. These are post-quarter events; the filing describes proceeds as expected.
The $25m Allseas-affiliate credit facility was amended after quarter-end to mature November 30, 2024. It carries interest if drawn and a 4% annual underutilization fee on undrawn amounts; TMC reported $0.3m of such fees for the first half. The facility was undrawn at June 30.
Allseas and TMC are pursuing upgrades to the Project Zero offshore system, with estimated capacity targeted to increase in stages from 1.3m to 3.0m wet tonnes per year. A definitive development agreement remained under discussion. TMC also agreed to issue Allseas 4.15m shares for exclusive use of the Hidden Gem through completion of the system or December 31, 2026, whichever comes first.
Key risks include ISA and environmental approvals, regulatory uncertainty and opposition to seabed extraction; unproven commercial-scale collection and processing technology; reliance on Allseas and future financing; dilution; inflation and cost escalation; and the lack of revenue. Management notes higher marine fuel, vessel and offshore labor costs.
Contingencies include a shareholder securities class action awaiting a ruling on a motion to dismiss, an investor lawsuit filed in 2023, and an ongoing SEC investigation concerning the TOML acquisition and business combination. The filing says potential losses in the lawsuits cannot be reliably estimated. TMC also has litigation seeking damages from investors that did not fund commitments.

Important facts for investors to verify

Whether the ISA adopts exploitation regulations and approves NORI’s application, and the resulting schedule and terms.
Whether the August offering closed as expected, whether additional conditional securities were purchased, and how the proceeds affect runway and dilution.
Actual cash burn, upcoming exploration and application costs, and whether further financing is required beyond management’s estimates.
Whether TMC and Allseas execute definitive Project Zero agreements and whether capacity, costs, environmental performance and production timing prove achievable.
Progress and potential exposure in the disclosed litigation and SEC investigation; the filing does not provide a clear estimate of possible lawsuit losses.
Share dilution from the offering, warrant exercises, compensation awards and the agreed 4.15m-share vessel-use consideration.