TMC the metals company Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited U.S. GAAP financial statements; amounts below are U.S. dollars unless stated otherwise.
Business context
TMC is a pre-revenue deep-sea minerals exploration company pursuing polymetallic nodules in the Clarion-Clipperton Zone. It has not received an ISA exploitation contract or the permits needed for commercial operations. Its plans depend on regulatory approval, technical and commercial feasibility, environmental work, and additional financing.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 or prior balance-sheet date |
|---|---|---|
| Revenue | None | None |
| Exploration and evaluation expense | $7.2 million | $7.4 million |
| General and administrative expense | $6.2 million | $8.5 million |
| Operating loss | $13.4 million | $15.9 million |
| Net result | $2,000 income | $21.1 million loss |
| Operating cash flow | $(23.5) million | $(15.5) million |
| Investing cash flow | $5.0 million provided | $(0.2) million used |
| Cash at period-end | $28.4 million | $46.8 million at Dec. 31, 2022 |
| Total assets / total liabilities | $85.3 million / $29.7 million | $94.8 million / $53.3 million at Dec. 31, 2022 |
The near break-even net result reflected a one-time $13.75 million gain from transferring a 2% NORI royalty to Low Carbon Royalties, partly offset by operating expenses and other items. The company recorded a $0.5 million charge from the increase in fair value of private warrant liabilities. Margins are not meaningful because TMC has no revenue.
Operating cash use rose year over year, with working-capital movements, including a decrease in accounts payable and accrued liabilities, contributing to the outflow. Cash fell by $18.5 million during the quarter. TMC reported no borrowings under its new credit facility at quarter-end. Current accounts payable and accrued liabilities were $17.5 million; total liabilities also include a $10.7 million deferred tax liability and $1.5 million warrant liability.
Material changes and transactions
- Net income improved from a $21.1 million loss to approximately break-even, primarily because of the royalty transaction gain, not operating revenue.
- Exploration expense declined modestly, reflecting lower share-based compensation and reduced pilot-test activity, partly offset by higher environmental studies and engineering work. G&A fell mainly because of lower share-based compensation and investor-relations costs.
- TMC received $5 million in cash and a 35% initial interest in Low Carbon Royalties in exchange for the NORI royalty; its ownership was diluted to 32% after that entity issued shares to finance additional royalty acquisitions. TMC retains rights to repurchase up to 75% of the NORI royalty, which could reduce it to 0.5% if both repurchase options are exercised.
- TMC issued Allseas 10.85 million common shares at $1 per share to settle a $10 million pilot-test milestone and additional costs. Shares outstanding were 280.6 million at March 31; 280.64 million were reported outstanding May 10.
Outlook, risks and contingencies
- Management expects no revenue until at least 2025, conditional on an ISA exploitation contract and successful commercial-scale collection and processing. The company has discussed a commercial-production target around the end of 2024 or start of 2025, but timing is uncertain.
- TMC is preparing an application for the NORI Area D exploitation contract, with the work plan aimed at having the application ready for submission in the second half of 2023. Management says it will not seek to begin commercial operations before final ISA rules are in place, while noting NORI may have legal rights to apply before then.
- Management believes cash on hand and available credit should cover obligations due over the next 12 months, based on its forecasts. It also says additional financing is needed or being sought; delays, cost increases, or unavailable or unfavorable financing could force further reductions or delays in work.
- The unsecured Allseas-affiliate facility permits up to $25 million of borrowing, subject to conditions, and matures May 21, 2024. Drawn amounts bear interest at the six-month SOFR average plus 4% (or plus 5% if paid in kind); undrawn amounts incur a 4% annual underutilization fee. None was drawn in Q1.
- The 2023 NORI work plan is estimated at approximately $25 million and may be settled in cash or equity. TOML’s 2022–2026 program has estimated expenditure of up to $44 million, subject to change. Commercial system arrangements with Allseas remain under development and are not definitive agreements.
- Risks include unresolved ISA regulations and approvals, technical and environmental uncertainty, dependence on host-nation sponsorship, inflation and offshore costs, commodity prices, and future funding needs. TMC cautions that mineral resources are not reserves and do not have demonstrated economic value.
- Legal matters include an investor lawsuit filed in January 2023, two suits concerning unfunded Business Combination investments, a consolidated shareholder class action, and an SEC investigation relating to the TOML acquisition and Business Combination. The company denies wrongdoing; possible losses in certain cases cannot be reliably estimated.
- Management reported disclosure controls effective at March 31, 2023, and said a previously reported material weakness in internal financial-reporting controls had been remediated.
Important facts for investors to verify
- Whether the ISA adopts final exploitation rules and the timing and outcome of NORI’s application and required permits.
- Cash consumption, the assumptions behind management’s 12-month liquidity assessment, and access to additional funding or the undrawn credit facility.
- Progress, binding terms, cost, schedule, and production capacity for the commercial collection and processing systems.
- The economic effect of the NORI royalty transfer and any future exercise of TMC’s repurchase rights.
- Developments and potential financial exposure in the disclosed litigation and SEC investigation.
- Potential dilution from equity financing, RSUs, options, and warrants; public and private warrants have an $11.50 exercise price, and TMC stated it did not expect proceeds absent a significant share-price increase.