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Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

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Equity Bottom-Up

Collecting Nodules and Scientific Data as Regulation Timeline Nears

KEY POINTS

Net loss narrows.&nbsp;3Q22 net loss of $27.9 million (EPS of [$0.12]) was an improvement compared with the loss of $36.7 million (EPS of [$0.18]) in the year-ago quarter, on tight expense control, a $5.9 million decrease in non-cash share-based compensation, a $3.2 million reduction in environmental program costs, and $2.9 million in lower professional and other fees, partially offset by a $3.7 million increase in pilot mining costs.
Raised capital provides firmer footing.&nbsp;Following a successful $30.4 million PIPE financing completed during the quarter, TMC’s cash balance stands at $66.9 million as of September 30, 2022, and management believes cash on hand is sufficient to meet the company’s working capital and capital expenditure requirements for at least the next 12 months.
From proof of concept to operational scale.&nbsp;Following the receipt of the ISA’s recommendation in September that it proceed, TMC began its pilot-scale collector test at its NORI-D contract area in CCZ in October and completed it earlier this month, collecting 4,500 mt of nodules and lifting more than 3,000 mt to the surface at a sustained production rate of 86.4 mt/hour, thereby significantly de-risking the technical part of nodule collection and transportation in preparation for Project-0 operations, which are estimated to deliver production rates of more than 200 mt/hour.
Regulatory progress remains on track.&nbsp;Despite vociferous attempts by France to muddy the waters at the recently concluded meeting of ISA members in Jamaica by calling for a ban on mineral exploitation in international waters, the vast majority of ISA member states remained committed to work toward finalizing the rules and regulations pertaining to underwater mining by 2H23, keeping TMC’s goal of submitting its exploitation application for NORI-D in 2H23 on track.

THE COMPANY
TMC the metals company, Inc. (TMC) is poised to become the world’s largest miner and processor of metals critical to the EV, energy storage, and renewable energy industries, such as nickel, cobalt, copper, and manganese. The company is a pioneer in the deep-sea mining industry and is working to develop the capabilities needed to safely and cost-effectively extract polymetallic nodules found at the bottom of the Pacific Ocean in international waters off the coast of Mexico and Southern California. These fist-sized nodules contain the aforementioned critical metals in higher concentrations than can be found in conventional onshore metal deposits, making their subsequent processing more efficient, while cutting CO2 and other emissions by approximately 90% compared with mining and processing conventional onshore ores. TMC is aiming to begin collecting (a more appropriate term than “mining”) polymetallic nodules and delivering them to onshore processing plants at commercial scale by the end of 2024, after receiving the required regulatory permits and approvals.
For more information, visit&nbsp;www.metals.co.
We recently hosted a fireside chat with TMC Chairman &amp; CEO Gerard Barron, CFO Craig Shesky, and Project Director for NORI Grant Lindner. Click&nbsp;here&nbsp;for the fireside chat on demand.
3Q22 FINANCIAL UPDATE
Income Statement
For the three months ended September 30, 2022, TMC reported a net operating loss of $28.6 million versus a net loss of $37.1 million in 3Q21. Exploration expenses declined $1.1 million Y/Y during the quarter, as lower environmental studies expenses and $1.4 million in lower share-based compensation related to project development were partially offset by a $3.7 million increase in pilot mining test system expenses. General and administrative expenses also declined Y/Y from $13.9 million in 3Q21 to $5.9 million in 3Q22, driven largely by a $4.5 million reduction in corporate share-based compensation and a $3 million reduction in professional and other fees expenses. These Y/Y changes were driven by:

3Q21 option grants that were awarded in lieu of cash bonuses to retain DeepGreen employees in furtherance of the September 2021 business combination, which did not repeat in 3Q22.
Costs incurred in 3Q21 as the company executed an environmental campaign during that time to establish a pre-test environmental baseline conditions that will be incorporated into the scientific findings expected to be published in 2023, after the conclusion of the post-test monitoring campaign of the affected areas of NORI-D. Therefore, these costs did not recur in 3Q22.
3Q21 professional and other fees were abnormally high given the business combination taking place at that time. 3Q22 expenses were more reflective of corporate run rate.
3Q22 increase in pilot mining costs was driven by the expenses incurred in preparation for the October-November large-scale pilot mining trial, which was recently concluded. We expect these costs to increase in 4Q22 due to the expenses associated with the six-week pilot trial executed during 4Q22.

Balance Sheet and Cash Flow Statement
For the quarter, TMC used $8.7 million of cash for operating activities, a $1.7 million reduction compared with 3Q21, with free cash outflow of $9.2 million being largely in line with the year-ago period’s $9.3 million free cash outflow. For the first nine months of 2022, TMC reported $46.8 million in cash used for operating activities in 3Q22 versus $28.3 million expended over the same period in 2021, with free cash outflow of $47.8 million versus $23.3 million in the firsts nine months of 2021. As the result of more intensive cash use as TMC ramped up its pilot collection program and other operating activities and including the ~$30 million in PIPE financing raised during 3Q22, TMC had $66.9 million in cash on hand at the end of the quarter, which management believes will be sufficient to cover operating costs, working capital, and capex requirements of the company for the next 12+ months, by which time the ISA regulations around permit submission process and actual exploitation of undersea resources are expected to be completed.
While TMC has filed a $100 million shelf registration with the SEC, the company will be looking for other sources of funding, including strategic partnerships based on an earn-in financing structure, and is currently in discussions with several entities. In the event the regulatory hurdles are not cleared by July 2023, as expected, and project timing is extended, TMC believes it can reduce its operating costs (and cash drain) to $4 million/quarter, which would allow it to significantly extend its cash reserves past 12 months.
PILOT PROJECT SUCCESS
In conjunction with its 3Q22 update, TMC announced a successful completion of its pilot collection project in the NORI-D area of one of its three CCZ contract areas. While TMC has previously conducted several collection campaigns in the area, collecting 70 metric tons (mt) of nodules and successfully processing them in onshore pilot runs with its partners, the pilot test conducted over six weeks was the largest polymetallic nodule collection campaign in history, and the only such integrated test in more than 50 years, and provided definitive proof of TMC’s ability to effectively exploit its resource. During the six weeks, TMC’s underwater collector traversed more than 80 km of the seabed and collected more than 4,500 mt of nodules, transporting 3,000 mt of nodules to the surface via a 4.3-km long riser system.
Consequently, the pilot run confirmed the major elements of the technology and equipment the company will be utilizing in its Project-0 phase. This phase of production will include the use of the current collection ship—The Hidden Gem—and a modified collector vehicle with larger and more collector heads and a wider diameter riser that will allow for a collection rate of 200+ mt/hour, compared with the 86 mt/hour achieved during the pilot run. Management stated that the data collected during the pilot run will be used to improve, upgrade, and optimize the equipment and the collection process for Project-0 as well as for Project-1, which will expand production/collection by four ships, for a total of five vessels with up to four collectors each—the steady-state operational capacity currently envisioned by the company for its NORI-D area.
As a reminder, Project-0 envisions a production rate of 1 million dry metric tons of nodules annually that will be processed in onshore (preferably US based) metal processing facilities and converted to manganese silicate and NiCoCu matte and possibly all the way to individual metal salts to be used in EV batteries. Project-1 will expand on that capacity and reach an annual production rate of 9.5 million dry tons on nodules, making TMC one of the largest battery-critical metal producers in the world.
Environmental Data Collection
As part of its pilot project, TMC commissioned a second vessel to accompany The Hidden Gem, this one containing scientists and leading environmental experts from government agencies, industry consultants and universities, whose role was to observe the operations and independently measure the environmental impact of collecting on the ocean floor and surrounding ecosystems. The pre-collection environmental assessment of the area was completed prior to the commencement of the project to establish a baseline of undisturbed ecology. Numerous sensors and cameras deployed underwater monitored real-time impact of collection activities during the project and a team of scientists remains in the area and will measure the post-collection effects on the environment, thereby generating the data scientists need to objectively evaluate the environmental impact of the planned mining operations. We expect the results and conclusions based off the collected data to be published throughout 2023 and to be used by the ISA and other stakeholders in completing the regulatory framework around deep-sea mining in international waters. Once completed next year, TMC will have spent more than $100 million on the environmental research program (the vast majority of which has already been spent).
VALUATION
As a pre-revenue company, TMC valuation considerations are inherently less definitive than would be the case for an operating company. Methods like P/E or Enterprise Value to EBITDA comparisons therefore are inappropriate, without significant subjective assumptions regarding TMC’s future operating profile, revenue and margins, capex and D&amp;A projections, etc. However, mining companies, whether in the state of production or development, can be valued using the net present value (NPV) of the resources a company possesses, including measured, indicated, and inferred. In TMC’s case, according to the company’s SEC filings, the NPV of the NORI-D resource alone, which represents 41% of the NORI contract area and 22% of the company’s NORI and TOML properties combined, is $6.8 billion, using a 9% annual discount rate. This would make the NORI-D resource more valuable than any other nickel, copper, cobalt, or even precious metals resource currently being developed in Australia, Canada, the US, or elsewhere.
Using current metal prices versus prices used to establish the NPV in the SEC documents, the value of TMC’s NORI-D resource can be estimated at $15.9 billion and with metal prices expected to continue to increase, driven by current and pending supply shortages, the NPV may increase further. It still represents less than half of TMC’s resources contained in NORI and TOML contract areas.
From a valuation perspective, NPV can be incorporated into a comparative ranking of public company market capitalization. Thus, a producing base metals company’s market cap on average is 1.6x NPV of its mineral resources. Clearly, being approximately two years away from production, TMC’s MC/NPV multiple would need to be appropriately risk-adjusted. We believe 25-35% of NPV to be an appropriate discount for a pre-revenue company with well-defined resources (as NORI and TOML properties are). Thus, a 0.4x MC/NPV multiple would be implied, which for TMC would represent market cap of $1.7-2.4 billion using SEC documents’ NPV and as much as $4 billion, using NPV based on current metal prices, versus the company’s current $232 million market cap.
However, in the case of TMC, the company’s resource is in international waters with the rules and regulations regarding its exploitation yet to be finalized. Incorporating the risk associated with potential regulatory delays and the ultimate regulations potentially being more cumbersome (costlier) to follow, possibly resulting in higher-than-anticipated operating costs, a further discount of 50% may be justified, resulting in TMC’s implied fair value market cap of approximately $2 billion at current metal prices. Even this level of conservativism would suggest that TMC stock is undervalued by close to a factor of 10x on a discounted and risk probability-weighted basis and could justify a stock price north of $5 in the near term as more investors become aware of this opportunity. That’s just valuing the NORI-D section (just 22% of TMC’s total estimated resource across NORI and TOML)!
From a comparative analysis perspective, using late-stage copper developers, given a lack of late-stage nickel developers that are publicly traded, as valuation comps underscores the scale of underappreciation apparent in TMC shares, as shown in Figure 1.
Figure 1. Comparative Peer Analysis


Source: Company reports

OUR INSIGHTS
Opportunities
The successful completion of the pilot test of the collector-riser-vessel mining process should fully validate TMC’s technological capabilities to economically exploit the seabed metal resource, enhancing investor confidence in the company’s ability to bring this resource to commercial production, once regulatory framework is established and its application for exploitation is approved by the ISA.
With $66.9 million of cash on hand, TMC possesses sufficient capital resources to finance its operations for at least the next 12 months. The company suggested in its prior earnings call that it would need ‘circa $100 million’ of additional cash to get into production at the end of 2024. TMC has a $100 million universe shelf registration in place, but the company has expressed to the market a desire to raise the required funds at the operating company level (e.g., earn-in type structure into the NORI-D asset itself).
Project-0 operations with one vessel and one collector should allow TMC to transform into an operating miner, with approximately $500 million in annual revenue (at current metal prices) and to begin ramping up Project-1, likely relying upon partners with long-term contracts and/or tolling arrangements to scale through a capital-light approach, which will increase collection volumes and therefore revenues ~10x versus Project-0 scale.
Obstacles
ISA regulations, already delayed by two years because of COVID, may not be issued in July 2023, as expected, thereby delaying TMC’s timeline to production.
Environmental activism aimed at stopping all mining everywhere may result in both regulatory and production delays.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Dmitry Silversteyn, who is the writer of this report, covers the BioEconomy and Chemicals &amp; Materials Technology sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.  The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Momentous Milestone Achieved as Pilot Collection Project Is Completed

Tapping Untapped Resource to Address Unmet Need

Canada

TMC the metals company Inc. operates as an electric vehicles battery metal company. The Company produces metals from polymetallic rocks to store clean energy and power electric vehicles. TMC the metals serves customers worldwide.

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