The Metals Company — Mining battery metals for electric vehicles

TMC is a pioneer in deep-sea mining, via the collection of polymetallic nodules containing battery metals, primarily nickel. The shares listed on Nasdaq in September 2021 through a special-purpose acquisition company (SPAC) transaction. The debut was negatively affected by certain investors not providing the anticipated capital, while investor appetite for SPACs and higher-risk stocks has also waned. However, TMC has progressed its exploration and technical resource report and expects to submit the required documentation for an exploitation contract in Q323. Fundamentals have also improved with nickel up 30% since September 2021.

The nodules that TMC is looking to retrieve from the seabed contain nickel (1.42%), cobalt (0.13%), manganese (32.2%) and copper (1.16%). These metals are key to batteries for the automotive industry as it looks to decarbonize. The latest battery technology, NMC811 cathode, uses 80% nickel, 10% cobalt and 10% manganese by weight and the average car, with a 75kWh battery, requires around 60kg of nickel along with the commensurate volumes of cobalt and manganese. Assuming such metrics, we calculate that the estimated reserves from TMC’s two key concessions (16.1Mt, the second-largest resource in the world) contain sufficient nickel (post collection and processing losses) for c 230 million electric cars, which compares to the US current car parc of c 285 million units. Whilst EVs and nickel (Edison estimate 45% of sales) are key, the manganese silicate produced is used in steel manufacturing providing useful end-market diversity.

Key valuation drivers are the state of the projects and metals prices, nickel having been particularly volatile in 2022. Our current valuation range of $244–484m based on 2021 long term metal price forecasts, or $719–1,278m using current June 2022 metal prices, uses a discount rate range of 29%–34% to reflect the relatively early (PEA/PFS) stage of the project. The key de-risking anticipated, the award of an exploitation licence is anticipated for 2024. This would see our valuation range increase to $552–1,182m based on 2021 long term metal price forecasts, or $1,433–2,857m using current June 2022 metal prices, (discount rates 22–28%). First commercial operations, due in late 2024, would increase the valuation to $1.0–1.7bn using 2021 long term metal price forecast, $2.5–4.1bn on current metal prices (discount rates 19–23%). Full commercial operations, assumed in 2027, would see our valuation increase to a range of $4.8–6.3bn or $10.9–14.1bn (discount rates of 9–11%). Our unrisked base case valuation of $5.5bn (note this is below the AMC Consultants $6.8bn valuation quoted by the company due primarily to discount rate and the impact of greater outsourcing on operating margins). This valuation is based solely on the NORI-D project, which accounts for 22% of TMC’s estimated TOML and NORI reserves. The next project planned, TOML-F, is adjacent to NORI-D and initial estimates suggest it contains c 70% as much nickel, copper, cobalt and manganese. However, reflecting the earlier stage of the TOML-F project, we have not included it in our current valuation. The potential is clearly significant although it is imperative for investors to understand the licensing, financial and operational risks.

Through its subsidiary NORI, TMC, in 2021, notified the ISA of its intent to apply for the first commercial (exploitation) licence for deep-sea mining. This triggered a two-year timetable requiring the ISA to complete the necessary mining regulation by 9 July 2023 paving the way for the award of an exploitation licence by Q324. However, there is significant opposition including over 100 non-governmental organisations (NGOs), while the position of many nations is also unclear. Concerns are primarily on environmental grounds including the impact on biodiversity from loss of habitat and sedimentary plumes created in the mining process. Many are calling for a ban or, at the very least, a moratorium until further research of this little understood region can be undertaken; others view this as a chance to proactively regulate this new industry. The ISA’s mandate for both commercialisation and protection of the marine environment highlights the complexity of the situation. Given the impact of a go/no go decision on TMC’s activities, the award of a licence is clearly the crucial value driver at present.

TMC had $69m of cash at the end of Q122, which management states is sufficient to cover the on-site trials set for Q322 and continued development of the licensing process. To optimize cash flow TMC has moved to an outsourcing model. Framework agreements have been signed with Allseas Group (offshore nodule mining) and Epsilon Carbon (onshore processing). While these need to be converted into full commercial contracts (including third-party financing), this outsourcing will significantly reduce the financial requirements for TMC to commence commercial operations (Edison estimate c $140m). The second and key commercial stage of the mining program will require additional financing; we have penciled in $250m in 2025, but the level and scale will depend on degree of outsourcing, etc, and hence is unclear at present.

Deep-sea mining has never been undertaken commercially before, albeit four consortia, including companies such as Lockheed Martin, BP, Shell, Sumitomo and Rio Tinto, did retrieve significant tonnages in trials in the 1970s. TMC, with Allseas, has developed a seabed mining nodule collector machine and riser systems capable of operating at depths up to 6,000m. The deepest commercial oil rig is 3,400m, highlighting the pioneering element. Recent trials were encouraging with the collector operated at 2,475m and the riser and jumper hose system at 745m. Deep water trials are due to take place on site in Q322. Note that GSR collected nodules at a depth of 4,500m in 2021.

TMC CEO Gerard Barron was a founder investor of Nautilus, which had planned to mine subsea in Papua New Guinea, but filed for bankruptcy in 2019. Mr Barron was not a board member or employee of Nautilus at listing or subsequently.

The Metals Company was formed in 2021 through the combination of Canadian mining company DeepGreen Metals with a US SPAC, the Sustainable Opportunities Acquisition Corporation. The shares listed on Nasdaq in September 2021. TMC is looking to mine polymetallic nodules in the deep water (over 4,000m) of the Clarion Clipperton Zone (CCZ) off the south-west coast of Southern California. These nodules contain nickel, cobalt, copper and manganese, all metals essential for the electrification required for decarbonizing the transport sector. The company has been carrying out resource analysis and environmental investigation in the region since award of an exploration licence in July 2011. Its subsidiary NORI, sponsored by the of state of Nauru, lodged a two-year notice in June 2021, triggering a process for the adoption of mining regulations. This will be followed by an exploitation application in 2023 that the company expects to lead to the first commercial licence in the region being awarded by Q324. If awarded, it would be the catalyst for an initial small-scale commercial project commencing in Q424, with a full commercial project planned from 2025.

The resource

The CCZ is an area of over 3m km², c 0.8% of the world oceans, situated in the north-east of the Pacific Ocean, around 1,500 miles off the coast of Southern California, and therefore in international waters; see Exhibit 3. The region is defined by two major fracture zones running through the seafloor – the Clipperton Fracture Zone to the south and the Clarion Fracture Zone to the north – and reaches depths of 6,000m.

The seabed of the region contains polymetallic nodules. These small stone-like nodules (weighing less than a kilo) are formed through deposition of iron and manganese hydroxides from seawater over millions of years and contain nickel, cobalt, copper, manganese and iron oxides/hydroxides. These metals are key materials for EV lithium-ion batteries, currently dominated by lithium-nickel-manganese-cobalt-oxide (NMC) chemistry reflecting the high content of nickel, manganese and cobalt. The decarbonisation agenda and shift to EVs will drive demand for battery metals and hence interest in new mineral deposits such as deep-sea nodules. The nodules sit on or just below the seabed; see Exhibits 1 and 2.

Through its partnership arrangements with sponsoring governments, TMC companies have been awarded three licences for the exploration of polymetallic nodules in the region (see Exhibit 3). Note that it is a requirement of the ISA that applications are sponsored by a state government, which is also responsible for adherence to the relevant legal duties. TMC has the developed the following agreements:

TMC’s first area of focus has been on a sub-region of the NORI block known as ‘NORI-D’, which accounts for 22% of TMC’s total estimated resource across NORI and TOML for which there are publicly available resource statements. The mineral resource estimates are based on the historical box-core and free-fall grab nodule sampling (262 samples) supplemented with recently acquired TOML nodule box core (113 samples). They have been classified under SEC Mining Rules to reflect the level of certainty: measured, indicated, inferred, in descending order. TMC is now in the process of applying for the first commercial mining licence in the region, as discussed in the regulatory section.

The resource estimate suggests that NORI-D contains around 3.8Mt of nickel. TMC estimates that its reserves for the two concessions where exploration has been carried out hold a total of 16Mt of nickel. Note that Edison expects nickel to account for c 45% of revenue, with the remainder from other battery materials cobalt, copper and manganese.

Putting this into context, the two TMC concessions (NORI and TOML) reserves are second only to Russia based Nornickel (18.9Mt). Alternatively, assuming 60kg of nickel per car, a 90% retrieval rate and a 95% conversion rate, we estimate that the concessions have sufficient resources to power 230 million vehicles, compared to the entire US car parc of c 285 million units (world car parc c 1.4bn).

The United Nations set up the UN Convention on the Law of the Sea (UNCLOS) in 1982 to create a legal framework to govern all marine and maritime activities, bringing together four previous treaties into a unified code. The agreement has been signed by 167 countries and the European Union, although not by the United States (note TMC is a Canadian registered company although US listed). Two key elements included:

The International Seabed Authority

The ISA is based in Jamaica. To ensure that the ISA reflects the interests of all nations, it consists of member groups with diverse interests, as shown in Exhibit 7. The ISA has dual mandates: promoting the development of deep-sea minerals while ensuring that this development is not harmful to the environment.

The current regulatory state in terms of commercialisation of the deep sea can be split into:

It is also worth noting the key strategic directions adopted for 2019–23:

In June 2021 NORI notified the ISA that it intends to apply for an exploitation contract (licence) effectively triggering Annex Section I, paragraph 15b of the Agreement relating to the Implementation of Part XI of the United Nations Convention on the Law of the Sea of 10 December 1982. This states that: ‘If a request is made by a State referred to in subparagraph (a) the Council shall, in accordance with article 162, paragraph 2(o), of the Convention, complete the adoption of such rules, regulations and procedures within two years of the request’.

In August 2021 the secretary-general published a further update ‘Status of the draft regulations for exploitation of mineral resources in the Area and proposed road map for 2022 and 2023’. Included in section IV paragraphs 12 and 13 is the following text:

‘By letter dated 25 June 2021, the President of Nauru notified the Council of the intention of Nauru Ocean Resources Inc., a Nauruan entity sponsored by Nauru, to submit an application for approval of a plan of work for exploitation in the Area. In such circumstances, section 1, paragraph 15 (b), of the annex to the Agreement relating to the Implementation of Part XI of the United Nations Convention on the Law of the Sea of 10 December 1982 requires the Council to complete the elaboration of the rules, regulations and procedures necessary to facilitate the approval of plans of work for exploitation in the Area within two years of the request’.

In order to meet that deadline and to ensure that a robust and holistic regulatory framework is adopted by the Council on or before 9 July 2023, it is clearly necessary for the Council to commit more time and financial resources to accelerate work on the draft regulations.’

Once these regulations have been adopted, NORI’s application can be considered and a licence granted. TMC’s expected timeframe from adoption of the regulations is shown in Exhibit 8.

If agreement is not reached, these timelines could obviously change. Decisions by the ISA are primarily based on consensus, but allow for votes requiring a two-thirds majority where this is not possible. In the case of mining regulation, the default is adoption of the proposals, with a two-thirds majority vote needed to overturn the default.

Given the sensitivities to mining and the use of the ocean, combined with the newness of such exploitation, it is hardly surprising to see significant attention from third parties.

There is significant pressure from a range of NGOs to prevent deep-sea mining. The Deep Sea Conservation Coalition has 99 members including Greenpeace and the WWF and concerns itself with deep-sea mining, deep-sea fishing and ocean governance. Its stance on deep-sea mining is for: ‘a global moratorium on all exploration and mining activity until the risks are better understood and it can be clearly demonstrated that mining can be managed in a way that ensures the effective protection of the marine environment and prevents loss of biodiversity’.

The WWF sponsored a call for a moratorium on deep-sea mining citing limited research and looking for a ban until further research has been conducted. Current signatories include BMW, Volvo Group, VW, Samsung SDI, Scania, Microsoft, Google, Patagonia, Philips, Triodos Bank, Renault and Razer. The automotive companies that have signed accounted for c 24% of 2021 world auto sales.

The Congress of the International Union for Conservation of Nature (IUCN) voted overwhelmingly in favor of a moratorium on deep-sea mining (81 governments and government agencies voted in favor of the IUCN moratorium motion and 18 voted against). That same day, the European Commission published its 2021 Strategic Foresight Report, announcing plans to step-up deep-sea mining exploration, ie there are significant variances in views, albeit with many of the larger nations on the more pro mining stance, arguably evidence by France, India, China and Russia holding exploration licences. The true position of governments is only likely to become clear as the ISA legislative process proceeds.

As previously mentioned, the ISA is at advanced stages with its draft regulation on the development of mineral resources. The following is an extract of Regulation 2 of the draft regulation concerning the environmental considerations that must be taken into account:

e.  Provide, pursuant to article 145 of the Convention, for the effective protection of the Marine Environment from the harmful effects which may arise from Exploitation, in accordance with the Authority’s environmental policy, including regional environmental management plans, based on the following principles:

Objectors believe that there is insufficient research to be able to from a biodiversity perspective to provide a baseline from which any activities can be monitored, along with insufficient information of the impact of mining and hence the application of the precautionary approach should be adopted.

The current process and timescale for adoption of mining regulations and award of a licence support TMC’s optimism. The flipside is that large multinational organisations tend to move slowly and with caution, we note that mining legislation has been a work-in-progress for the ISA since 2014, and there is clearly significant opposition, which may lead to legal challenges, which could have an impact on the process. We have no particular insight, but will hope to gain further information from the July ISA sessions.

According to the International Energy Agency (IEA), transportation accounted for 26% of world emissions in 2019, of which passenger cars accounted for 48%, thereby translating to c 13% of overall global carbon dioxide (CO₂) output. This highlights the environmental importance of decarbonizing the sector where the only viable option currently on the table is battery EVs. With no substitute likely for lithium-ion batteries, at least in the short term, the question becomes how the required materials can be attained economically with the lowest-impact footprint.

The lowest environmental impact comes from recycled material. If we consider nickel, TMC’s key resource and a key component for battery manufacture, the Nickel Institute states that nickel recycling currently stands at c 350,000 tonnes a year or c 83% of ‘end-of-life’ material including 15% remaining within the steel cycle, leaving c 17% sent to landfill. This would suggest that improving recycling rates could add, at most, a further 50,000 tonnes a year. This is potentially helpful but with a market expected to grow in excess of 100,000 tonnes every year and little likelihood of sufficiently accelerating scrap material before significant volumes of EV batteries reach end of life (10 years plus), recycling cannot provide the solution. In the longer term, the IEA suggests that by 2040 recycling of EV and storage batteries will generate an additional c 500kt of nickel, still only the equivalent of 7% of projected demand, supporting the view that recycling alone will not provide sufficient nickel. Even the WWF appears to acknowledge that recycling will not fill the void: ‘Metals have the theoretical potential for almost infinite recovery and reuse through recycling. However, in light of the pace and scale of current and expected demand growth, recycling does not provide substantial potential to limit immediate primary mineral demand’ (source: An investigation into seabed minerals and seabed mining).

The logical conclusion is that, to fulfil the projected demand growth, material must come from primary sources. This means from additional traditional land mining or from the proposed deep-sea resources.

Exhibit 9 compares the impact of land mining, which will need to be expanded in biodiversity-rich areas such as Indonesia, with deep-sea mining.

The information for this section is taken primarily from the life-cycle assessment 2020 white paper Where should transition metals come from? This was sponsored by TMC but also peer reviewed. It looks at the cradle-to-gate impacts assuming that gate-to-grave (ie manufacturing onwards through the life cycle) impacts should be alike. It is based on battery cathode precursor materials and copper for one billion electric cars. Key assumptions are for cradle-to-gate production of nickel sulphate, manganese sulphate, cobalt sulphate and copper cathode assuming NMC811 cathode chemistry and 75kWh battery capacity per vehicle. A further life cycle analysis report by Benchmark Mineral Intelligence is due later in the year.

Below we review the potential impacts in more detail.

Exhibit 9 suggests that the lifecycle global warming potential (GWP) for land mining is over three times that of deep-sea mining. Detailed production emission comparisons are highlighted in Exhibits 10 and 11. These show land mining and initial processing (concentration) account for 51% of emissions reflecting both blasting but also the energy intense commutation (grinding) before initial treatment stage. These activities must take place near the mine, hence tend to be off-grid and run from diesel generators. Processing and refining are also heavy users of electricity, providing a significant footprint. This may change over time as the grid decarbonizes although declining ore grades will provide a headwind.

For deep-sea mining, nodule extraction and transportation accounts for c 6% of emissions, although this benefit is partially offset by the high energy required to process the manganese (note that the overall energy usage is similar between the two). In terms of carbon sequestration, land is significantly higher than the deep seabed, due in part to its inability to use low carbon energy sources.

A further key concern relates to the destruction of carbon sinks. Disturbing sediment with its low carbon content (sampled at 151.9 tonnes/km²) and with 99% expected to resettle within two months suggests very limited carbon release potential. Deforestation in areas such as Indonesia for mines, tailing dams and infrastructure has a significant impact before considering the potential impact from discharges such as air pollution. However, it is worth noting that the research for the deep sea is currently more limited.

Deep-sea mining lifts the nodules from the sea floor; the nodules contain very little waste (residual waste can be used as aggregate), whereas traditional land mining involves mining the entire ore deposit and processing to extract the sought-after metals, leading to significant mass of waste and tailings. However, it is worth noting that nodule mining involves scraping the seabed and while the sediment is returned, this disruption has a different environmental impact. Land mining ore extraction involves significant amounts of fresh-water usage, which nodule mining does not.

Deep-sea mining’s impact on animal life is expected to be low; Exhibit 9 suggests 93% lower loss of animal life for deep-sea compared to land mining, primarily reflecting the very low levels of concentration of deep-sea creatures. That is not to say it will be immaterial as there are clear environmental questions and concerns reflecting the limited knowledge base and slow growth rates in such a cold, harsh and nutrient-deprived environment (see Exhibit 14). There is no flora as light cannot penetrate to such depths. Inevitably there will be some limited toxicity from vessels etc, but again this is expected to be low on a per tonne mined basis. This compares to the complete removal of habitat for land mining. In the higher regions of the sea, pollution such noise, vibrations and light pollution, as well as potential leaks and spills of fuel and toxic products, could affect a range of species such as whales and tuna or birdlife, arguably the case for all shipping activities.

Deep-sea mining’s impact on human life is expected to be low, with no displacement of indigenous communities. Mining methods should also prove less risky; note that the second largest nickel mining company, Norilsk Nickel, currently averages 10 fatalities a year. The reverse side of this is that deep-sea mining’s low labor intensity means fewer jobs will be created.

We have outlined some of the main elements of environmental concern around biodiversity and ecosystems in the section above. Below, we highlight two key aspects and some of the counter and protective measures being put in place by TMC.

The scraping of the ocean floor by machines can alter or destroy deep-sea habitats, leading to the loss of species or loss of ecosystem structure. Many species in the deep-sea (of which 70% by biomass are bacteria in the abyssal zone) are endemic and growth rates, due to the conditions and lack of nutrients, are slow, which affects any recovery rates. In addition, the removal of nodules also removes a potential key habitat.

TMC’s position is that it will only remove the top 5cm of the surface with 95% being returned immediately post separation of the nodules. In addition, 43% of the total CCZ is under protection, while TMC intends to leave 10% of the licence area untouched and also anticipates that mining will leave 15% of nodules in situ.

Deep-sea mining will create plumes of suspended particles from both the initial mining operation (benthic plumes) and from returning the water and sediment post on-board processing (return water plumes). It is unclear how far these particles may disperse, how long it would take for them to resettle on the seafloor, and to what extent they may affect ecosystems and species. Note, recent MIT, German government and contractor studies suggest the seafloor plumes will be localised and settle quickly and that the return flume is highly diluted.

TMC expects over 90% of the sedimentary plumes to come from the collector discharge (benthic) with less than 10% from the return water discharge. The benthic plumes tend to contain larger particles and, being released close to the sea floor, are expected to settle relatively close by. The return water plumes are released in the mid ocean over 1,000 meters below sea level to reduce potential impact to sea life, but, given the further distance to the seafloor and the smaller particles generally contained, dispersion is expected to be somewhat wider. Significant work, both modelling and trials, has been carried out (see NORI Environmental Impact Statement (EIS) Physiochemical Environmental Impacts and NORI EIS Appendix 6 ‘Characterization of sediment plumes behind mining vehicles in the NORI area’ Muñoz-Royo, C., Peacock, T., Alford, M.H. et al., Extent of impact of deep-sea nodule mining midwater plumes is influenced by sediment loading, turbulence and thresholds). The Q322 scheduled collector tests on site in the CCZ should provide further clear evidence of the plume dispersion rates.

TMC is clearly exposed to commercial licensing and environmental issues and has undertaken significant research in the area. To date it has completed 18 campaigns totaling 710 days at seas. The current commitment is a $75m program for which TMC has carried out nine campaigns since the start of 2019, despite COVID-19, with over 273 days at seas. The most recent activity is highlighted in Exhibit 16.

This research forms a critical element of the revised EIS based on stakeholder feedback filed by NORI in March 2022, a pre-requisite for the collector tests expected to be undertaken in Q322. The results will form a key part of the Operational Environmental & Societal Impact Assessment and the Environmental Managing & Monitoring Plan required for a commercial deep-sea mining licence application. Note in particular details on studies of marine life (Biological Environment) and the responses to public comments including the Deep-Ocean Stewardship Initiative (DOSI), Deep Sea Conservation Coalition (DSCC), Deep Sea Mining Campaign (DSMC), Mining Watch Canada (MWC), The Pew Charitable Trusts (PEW) as well as the UK, German and UK governments.

Further actions from TMC include a recently published sustainability report. In addition, TMC has commissioned Benchmark Mineral Intelligence to undertake a further life cycle assessment (LCA) focused on the NORI-D area and comparing it to alternative land ores. Finally, TMC has also committed to having a ‘digital twin’ to be engineered by specialist Kongsberg to enable real time monitoring of its seabed operations.

Deep-sea mining clearly has a number of environmental and sustainability benefits when compared to land mining. The key area of contention is over the biodiversity impact. TMC proposes that the CCZ has low levels of diversity, see Exhibit 17, compared to land mining. Note that biodiversity, in terms of species richness, is much harder to measure and has not been achieved as yet. It also points out that 43% of the CCZ is under protection (above the proposed global target of 30%). The opposition points to the potential destruction of habitat and loss of biodiversity, with its main point of contention being that there is currently insufficient research and information to arrive at a considered view.

There is clearly a trichotomy at play here and, assuming that people are not going to give up their passenger cars, a route forward with the least environmental impact is desired. Additional land mining requires destruction of natural habitat in biodiversity-rich regions such as Indonesia. Evidence would appear to support deep-sea mining having the lower, but not zero, impact, albeit there remain questions over the level of detailed information on the region and the impact of mining. The third option is to use less nickel and associated EV metals by slowing down the transition from internal combustion engine to EV. This would reduce the speed of decarbonisation and increase the likelihood of missing the Paris 1.5° or even the ‘less than 2°C’ target. Higher CO2 levels arguably provide a far greater risk to biodiversity and the oceans.

We expect nickel to be the most important revenue generator for TMC at c 45% of sales. The dominant use for nickel at present is in alloying, primarily for stainless steel. However, the key driver going forward is expected to come from batteries, primarily for EVs.

The key driver for growth in nickel consumption is expected to be stainless steel, being the dominant end-market at present, see Exhibit 19, and having shown steady growth over the last decade, while batteries for EVs, which only account for 6% of global demand at present, is set to be the fastest growth segment.

EVs have clearly come of age but still only accounted for 7.5% of global car sales in 2021 and hence Edison’s expectation is for strong growth (c 20% pa) to the end of the decade. There is a range of technologies vying for the EV battery market. For further detail see Edison’s EV outlook. At present the technology is dominated by nickel manganese cobalt oxide (NMC) at over 70% and nickel cobalt aluminum oxide (NCA) at around 20%, both using nickel-based cathodes. In addition, nickel content per battery continues to increase due the performance improvements with NMC batteries migrating from NMC111 (the numbers denote the ratio of nickel to manganese to cobalt) to NMC532 to NMC622 and now NMC811. The potential longer-term downside scenario for nickel is that in the short term, higher prices are affecting the performance/price balance and increasing interest in alternative technologies such as lithium iron phosphate (LFP). This is evidenced by Tesla’s announcement in 2021 that its standard-range EVs would be switched to LFP technology although longer-range vehicles are to remain with NMC cells.

Putting these together, assuming 3% pa growth for stainless steel (down from 5.2% over the last decade) and 20% pa for EVs (ignoring rising nickel content per vehicle to offset any gains from other technologies) equates, in our estimates, to 55% growth or an additional 1.4Mt of nickel demand by the end of the decade.

Production and reserves by country are shown in Exhibit 23 and 24. Nickel comes in two grades: (1) high grade/Class 1 nickel (>99.8% purity) generally produced from nickel sulfide deposits; and (2) lower grade/Class 2 (<99.8% purity), which comes from laterite deposits. Around a third of global production is Class 1 and two-thirds Class 2, which has been growing due to the lower cost of processing into nickel pig iron (NPI), which can be used in the production of stainless steel. Batteries require Class 1 nickel. The key source of additional supply is expected to be Indonesia (source: Norilsk Nickel), which has significant resources but will be Class 2 nickel, suggesting that the market for battery-grade nickel will remain tight, particularly as demand grows.

There are also potential political issues that could impinge on the supply side, particularly for western countries. Russia accounts for 11% of production but around 20% of Class 1 nickel. Obviously, the outlook for Russian material is unclear at present. China currently accounts for around half of the EV market, yet it has a limited position in nickel mining, particularly when compared to its strong position in rare earth metals. Hence China has reportedly been signing and financing tie-in supply deals from new mines, particularly in Indonesia. This could create further supply pressures, especially for western countries.

The demand growth profile for nickel is clearly positive while supply growth is less clear. This would suggest support for pricing. Exhibit 25 shows a positive price trend seen over the last five years, as well as the recent spike from dislocation in the market concerning the current geopolitical situation and a short squeeze due to concerns over a Chinese entity’s trading positions. Also note the 2007 spike driven by Chinese growth and associated speculation.

The mining operations involve a production vessel connected to seafloor collectors via riser pipes and pumps. The collectors sweep the sea floor, scooping up nodule-containing sediment, while being designed to create minimal disruption. The nodules are then extracted from the sediment and propelled up to the support vessel through the riser system for processing, and excess sediment is returned to the seawater at depths to minimize impact. The nodules are then transferred to a secondary ship for transportation to shore for processing.

Once shipped to shore the nodules will undergo two separate processes:

Subject to receiving the exploitation licence, management has outlined its initial mining plan. The aim is to mine section D of the NORI block. This will be progressed in two stages:

The initial project provides a testing ground for the mining systems and refining, yet is significant enough to be of commercial scale (Edison estimates annual revenue of $500m at long-term assumed metal prices). The plan involves outsourcing of key operations to minimize capital requirements and reduce operational risk.

A full-scale commercial mining program is to follow as soon as practical with a target date of 2025. This is expected to involve ships with multiple mining units and at least two onshore processing units and refineries. The capital cost modeled by AMC in the Initial Assessment report was $7bn ($2.2bn offshore, $4.8bn onshore), albeit this ‘fully integrated’ plan has now been adapted towards an outsourced/tolling model.

TMC’s key partner is Allseas, a private offshore contractor specializing in pipelay, heavy lift and subsea. Allseas acquired a deep-water drill ship in 2020 for conversion and has been working on designing and testing the collector system since 2019. Key elements include the collection mechanism with specialist nozzles to limit seabed disruption, along with the internal processing and diffuser to maximize the return of sediment to the sea floor. The riser system injects compressed air, at 200bar pressure, into the system to ensure fluidisation of the stream along with a combination of pressure differential and vertical pumping to propel the nodule-rich solution to the ship and separation unit. The water and sediment are returned at below 1,200m depth to reduce any impact to the upper ocean. Recent successful trials of the system have been completed including operating the collector vehicle at a depth of 2,475m and deployed the riser and jumper to connect with the collector at depths of around 745m. In-situ trials are due to take place in the CCZ in Q322.

In 2022, TMC and Allseas signed a commercial contract covering the collection and transportation of nodules for Project Zero. TMC will pay €150 per wet tonne of nodules to include mining and transhipment to shore. This rate is due to reduce by at least 20% as volumes increase to the target level. In addition, TMC will share the conversion costs required for the ‘Hidden Gem’, reducing TMC’s share to $55m. A non-binding term sheet was signed in March 2022 with a definitive agreement expected by 31 December 2022.

TMC completed calcination trials with FLSmidth in 2020 and alloying trials with Expert Process Solutions (XPS), a subsidiary of Glencore – a TMC shareholder with offtake agreements for 50% of NORI nickel and copper from TMC owned facilities, with support from Hatch and Optimize Group to produce a concentrated alloy of the key nodules metals suitable for further refining and battery manufacture. This demonstrated the ability to use existing technology and processes, thereby reducing risk and cost. Subsequently TMC has signed a non-binding MoU agreement with Epsilon Carbon, an Indian materials company associated with JSW Steel. The initial agreement is for a pre-feasibility report for a renewables powered processing plant in India with sufficient capacity to process the output from Project Zero. Management is targeting heads of terms for construction and operation (tolling) agreement in September 2022 and a full agreement by Q123. Funding will come from Epsilon with completion and commissioning due by Q324.

Given the similarities between Nautilus and TMC, both deep-sea mining companies albeit operating in different regions, deposit types and technologies, along with the degree of association, it is important that investors are aware of the Nautilus story.

Nautilus had been exploring the mineral-rich (copper and gold) hydrothermal vents off the coast yet inside the territorial waters of Papua New Guinea (ie PNG jurisdiction for mining rights). It was listed on the Canadian TSX Venture market in May 2006 along with a private placement. It subsequently listed on the UK AIM market in 2007 raising US$100m. Key statements at the time of the UK listing included alliances formed with major mining groups, specialist engineering and service companies and experienced subsea equipment suppliers including heads of agreement for construction of a specialized deep-sea mining vessel and contract to mine on behalf of Nautilus. The intention was, subject to the grant on a timely basis of a licence, to bring its primary project, Solwara 1, into production by the end of 2009. The impact of the financial crisis (financing and metals prices) and disputes with PNG were key in derailing these plans and the business was placed in administration in 2019.

TMC, through its predecessor company DeepGreen, acquired its TOML subsidiary from Nautilus. In addition, Gerard Barron, chief executive officer and chairman of TMC as well as a major shareholder (6.7%), was a substantial shareholder in Nautilus prior to the UK listing. Mr Barron was not a board member nor an employee of Nautilus at listing or subsequently.

TMC management claims that NORI-D will be the second lowest-cost producer of nickel and battery materials after the Nornickel mine in Russia. We have not looked to substantiate these claims but have constructed a financial model for the NORI Project Zero and NORI Project One projects using the information available in the AMC Technical Report of 17 March 2021, the 2021 10K stated by management and other external sources.

Project Zero will now be a largely outsourced model; these outsourcing contracts are with Allseas for the mining/shipping and with Epsilon for the primary treatment of the nodules into matte and convertor slag, leaving purely the refining element to be negotiated if required. The original plan for Project One was to maximize internalisation of the entire process from mining through processing. This would have required some $6bn of capex. A move to outsourcing inevitably increases operating costs, leading to some margin erosion but would have significant benefits in terms of reduced financial requirements while also offering investors a reduced risk profile for TMC, having limited expertise in metals refining and shipping operations. Our model therefore assumes full outsourcing. Edison’s key assumptions for processing costs, based on AMC’s report, and estimated tolling fees are shown in Exhibit 32:

Note that the figures for mining costs are significantly lower than the initial mining costs to Allseas (€150/t of wet nodules). No doubt the initial charges will carry a risk premium, but key is the scale of a larger vessel operating up to three mining subsea units versus a smaller vessel operating a single mining unit. It is also worth noting that outsourcing of processing activities is an option for nodule mining where the mass/volume involved for traditional mines necessitates construction of dedicated process units in the vicinity of the mine.

Key metal prices, as used in the AMC technical report, are shown in Exhibit 33 and are assumed average forecast prices from 2024 onwards for the life of the project.

The following provides a summary of Edison’s anticipated financials for TMC over the life of NORI-D project using the above assumptions. Note these would inevitably change at the group stage once additional NORI, TOML or Marawa projects start to enter the development stage. More detailed financial numbers are shown in Exhibit 49.

TMC had cash of $69.0m on 31 March 2022, down from $84.9m at 31 December 2021. Assisted by the deferred capex payments agreed with Allseas, management estimates that the group has sufficient resources for the next 12 to 18 months, including the Q322 collector test, as outlined in the Q122 conference call. Given the outsourcing route being taken for Project Zero, capex requirements, relative to the original project plans, are significantly reduced. Exhibit 36 provides our estimate of the additional capital required to get to start the commercial phase of Project Zero on the existing timeframe. Our model assumes an equity raise of $150m in 2023 at the current share price). At this point our model makes no assumptions for Project One, given the likely variables and range of potential requirements, including the degree of outsourcing, and of potential range of funding sources that may be available once Project Zero is operational.

Our valuation uses a discounted cash flow over the expected life of Project Zero and Project One. We have not ascribed any value to the additional resources at this time. As mentioned earlier in the financial section, we have made modifications to the original March 2021 AMC project economics to take into account the revised operating model, which now plans to outsource key onshore and offshore operations. Metal prices used are as per the longer-term forecasts used in the AMC report. Given the importance and changes in metal prices in 2022 our valuation uses 2021 forecast long term prices and current (June 2022) prices. Key variables are shown in Exhibit 37.

Our unrisked, fully financed, base case valuation for Project Zero and Project One comes in at $5.5bn using long term forecast metal prices from 2021 and $12.4bn using June 2022 metal prices. Note this our $5.5bn valuation is 19% lower than the AMC report’s $6.8bn. The key reasons are the discount rate of 10% versus 9% used by AMC, accounting for 12% variance, followed by the increased use of tolling for mining, processing and refining, which inevitably reduces the margin (but critically also reduces the capital required), and finally we have assumed a later start for Project One.

A 10% discount factor would suggest little risk premium, which is clearly not the case in an early-stage mining project (PEA/PFS stage). Our progress-driven valuation looks to capture the risk at different stages of the project via the discount rate, ratcheting down as particular milestones are achieved and the risk profile reduces.

The range of rates used is drawn from Edison’s mining research market valuation studies over the last decade. The research assesses the implied discount rate that the market is placing on mining companies depending on their state of development. The most recent, Gold stars and black holes, was undertaken in 2019. Exhibit 38 is taken from this document and highlights not only the average but also the range of rates.

The range of rates suggests that, while the state of a project is important, it is not the only aspect that the market and investors take into account. We also note that the MSCI mining index is up 48% in the three years since the study was undertaken, which would suggest a more positive sentiment (and hence possibly valuations) for miners and potentially imply an inherently lower discount rate. Hence, we have scoped our discount range towards the lower end of Edison’s discount discovery figures already noted. That is, the preliminary economic assessment (PEA) discount range is 31% (bull) to 36% (bear) against an average in Exhibit 38 of 35%. Exhibit 39 uses a range of discount rates relative to each stage of the project, flexed around the above Edison research. Development of valuation shown in Exhibit 40 and 41.

TMC is not a typical land-based mining company. The TMC initial listing and AMC technical report were based on a PEA, but the level of work carried out is somewhat more advanced. The company intends to publish a feasibility study in 2023 along with the detailed information required by the ISA to apply for a licence. However, given the state of the project at present and the de-risking undertaken, our view is that the pre-feasibility study (PFS) stage discount rate range of 29–34% is currently appropriate, providing a valuation range of $244–484m on long term forecast metal prices and $719-1,278m using June 2022 metal prices. The key event for the group is the award of a permit, which would be a significant de-risking of the business and would see our valuation range increase to $552–1,182m on long term forecast metal prices and $1,433 to 2,857m using June 2022 metal prices.

An alternative view is to plot how the valuation might develop over time depending on when the milestones are achieved. This is highlighted in Exhibit 42 and 43, including both event and anticipated timeline. Note that future valuations are higher than the current (2022) valuations due to the reduced number of discounted years. Valuations include the relevant financing required.

A further way to assess the project is to value Project Zero and Project One separately. Given the scale of the full commercial project (c 10x Project Zero) and the lack of scale economies in Project Zero, in particular the mining operations and leverage over central costs, it is not surprising that the initial Project Zero accounts for less than 10% of the total anticipated value as highlighted in Exhibit 44. Note these valuations use base case scenarios including a 10% discount factor.

There are many moving parts to the project and valuation. The following provides sensitivities to some key elements.

Metals prices are obviously a key variable and have been volatile over recent months. We note that the basket of metals associated with the nodules has recently been trading c 70% higher than our base case (long term metals forecast) levels. Inflation on costs is also expected, albeit somewhat more difficult to estimate. Exhibit 45 provides a view of the base case valuation using long term metal prices forecasts of $5.5bn for the complete project (Project Zero and Project One) for a range of nominal inflation/deflation rates for metals prices and costs. Note we have included a 50% outlier to broadly reflect the current nickel price premium to the long-term forecast prices from 2021.

The quality of NORI’s reserves is proven, but there remain significant operational challenges to achieve full commercialisation, suggesting a range of risk premiums/cost of equity albeit these should reduce as the project progresses. The most significant risks lie in timing and potential for delays to both the licensing and/or operationally. For example, the current time frame for construction of the processing unit in India is relatively short at about two years. Exhibit 46 highlights the impact on today’s valuation from delays.

Our valuation relates to NORI-D, which only accounts for 22% of the total estimated resources of NORI and TOML, hence there is further upside potential from the remainder of NORI as well as from the TOML and Marawa blocks. The next block expected to be developed is TOML-F, which is adjacent to NORI-D. Estimated resource content is c 70% that of NORI-D. However, reflecting the earlier stage of development (we assume five years behind NORI-D), we feel it is prudent to acknowledge but not include in our valuation at present.

The 2022 announcement on tests undertaken by SINTEF, an independent research organisation, found that TMC’s nodule-derived manganese silicate has a high grade but lower oxidation state compared to land-based ores; this could potentially reduce the energy intensity and overall cost of silico manganese (SiMn) production. Hence, TMC believes that this offers the potential for 7–17% higher value-in-use, depending on the carbon tax regimes of the territories where it is being sold. Exhibit 47 highlights the potential impact on the valuation. The upside reflects our expectation that manganese would account for c 30% of revenue and that no additional costs would be incurred to attain these price premia. Note these upside numbers are not included in Edison’s current valuation.

The company currently has $69m of cash but will need additional funds as the permitting and development program progresses. Edison estimates c $150m in 2023 where dilution will depend on the mechanism and share price at the time. In addition, there are outstanding warrants and share-based options etc. Exhibit 48 provides an indication of the level of dilution that can be expected at certain share prices along with cumulative exercise funds raised. The first key price is $11.5 a share, when the warrants become exercisable, although the share price would have to be over $50 before dilution from the warrants, options etc reaches 50%.

Significant de-risking has already taken place in 2022 with the Allseas and Epsilon agreements, with further progress as these agreements are converted into long-term contracts. The award of an exploitation licence is clearly the overriding landmark event. However, this is not expected until Q324 at the earliest. Shorter-term milestones include:

Inevitably for such a ‘ground-breaking’ project there are a range of risks. These include:

TMC has partnered with Allseas Group, a major offshore pipelay and subsea construction company, to engineer the nodule collection system, comprising a collector, a vertical transport system and the nodule collection vessel the ‘Hidden Gem’, which was previously an ultra-deepwater drillship. The self-propelled collector uses hydraulic methods to pick up the nodules from the seafloor, and an airlift driven riser and lift system (RALS) will raise the nodules to the surface with compressed air providing energy to the system at c 1,500m. Airlift has the advantage of having no moving parts on the sea floor, since the propulsion system is on the vessel. In addition, this system means there are no obstacles in the riser. It has also been shown that the system efficiency increases with water depth. Airlift was successfully tested in deep-water pilot tests in the 1970s. Two of these were carried out by the Ocean Mining Associates consortium, and one by Ocean Management, though these tests used smaller diameters and shorter lifts than designed for the deep-ocean mining system. There have also been several terrestrial tests, including at least one successful use of airlift for hoisting coal in a Russian mine. Although the Russian test is a shorter lift, the pipe diameters and flowrates are similar to those designed for the deep-ocean mining system.

The collector vehicle successfully underwent extensive underwater testing of critical mobility in the Dutch North Sea in March 2022 and is currently being tested in deeper waters in the Atlantic. A full integrated collector test, including nodule collection, is planned to take place over an 8km2 area in NORI-D in August/September 2022.