COLUMN | The Metals Company: dilution in action as founders file to sell their shares in the seabed miner [Offshore Accounts]

What did we spy on the last trading day before Christmas 2022? Not Santa sliding down a chimney, but shares in a leading subsea mining company sliding hard to a record low on December 23.

The cause was the announcement from The Metals Company that it had received approval to issue a bunch of cut price shares to raise up to US$30 million in cash in a so-called At The Market arrangement, which you can read here. The shares offered will be priced at US$0.60 per share, the last reported sale price of the common shares on the Nasdaq on December 21, the day before the arrangement was announced.

The Metal Company’s shares promptly crashed on the news and closed at just US$0.55 each that evening, only to stage a remarkable recovery, with a 17 per cent jump on Thursday, December 29, when they closed the trading day at US$0.70, and they then added another 10 per cent rise to US$0.77 on the last trading day of the year on Friday, December 30.

No, we cannot explain such ping-pong stock prices moves either, but such volatility is typical of a penny stock with few shares being bought and sold at the end of the year, and with investors possibly selling to crystallise tax losses, or trading on speculation on the next quarterly results.

Controversial pioneer with a chequered past

The Metals Company is the pioneer in subsea mining in the deepwater Clarion-Clipperton Zone of the Pacific Ocean, which covers 1.7 million square miles (4.4 million square kilometres) and holds vast fields of polymetallic nodules, rich in many of the metals needed for electric vehicles (but not lithium). We have covered the company at length before, because it exemplifies two key trends in the marine industry: 1) the use of ground-breaking technology to access hitherto inaccessible and unexplored areas of the seabed, and 2) the use of stock-based compensation to enrich a small group of insiders, whilst externalising many of the negative impacts of its operations.

It is a story that has everything – a global industry regulator located in Jamaica and that has asserted the right to license out vast tracts of the seabed in international waters under the auspices of the United Nations, and which will stand to profit massively from the development of the subsea minerals it controls, supposedly for the good of humanity as a whole. Critics of the head of the International Seabed Authority have been threatened with defamation lawsuits in the past, so we will keep our mouths shut about him, and refer you to the LA Times’ coverage here.

There are tiny Pacific island nations partnering with large listed companies like rig owner Transocean and dredging contractor DEME on subsea mining projects, arguing that the mining needs to start as soon as possible, in the face of objections from environmentalists, and even Google and BMW. There are business cases for investors with pictures of advanced robots “harvesting” nodules deep down in the cold darkness of the abyssal plain (here), and spreadsheets showing billions and billions of dollars of cashflow decades from now (here). There are many scientists wrangling over the impact of the subsea mining (here) and activists in small boats waving banners of protest.

Above all, there is the CEO of The Metals Company, Gerard Barron. “The first time Gerard Barron tried to mine the sea floor,” as the Wall Street Journal put it here, “the company he backed lost a half-billion dollars of investor money, got crosswise with a South Pacific government, destroyed sensitive seabed habitat and ultimately went broke. Now he’s trying again, but with a twist…”

The Metals Company – now part of a long and glorious offshore tradition

There is a long and rich tradition of offshore companies dumping bad news into the market just before the holidays. In 2019, December 23 was the date that Bourbon’s lenders obtained judgement to take over the company at the commercial court in Marseille, wiping out founder Jacques de Chateauvieux and the other shareholders (here). It was also on that date in 2019 that Norwegian subsea player DOF announced it was struggling to obtain the agreement of its lenders for its restructuring, a process that has still not played out three years on (here). In 2020, it was Borr Drilling’s turn, with the company announcing the bad news that it would be raising fresh capital and diluting its existing shareholders on Christmas Eve, and restructuring its loans, a message shortly followed a few days after Christmas by a press release that its CFO had resigned with immediate effect (here).

And now, The Metals Company joins this august group.

The latest twist: cash is king, though The Metals Company ain’t got much

In August, The Metals Company raised US$30 million in cash from a private placement of 38 million new common shares to investors, which included CEO Gerard Barron and his own family (here). Most of the shares issued then were priced at US$0.80 each. At the time, Mr Barron had claimed that this infusion of extra capital would be sufficient for the business to “fund operations for at least the next twelve months, past the date targeted by the International Seabed Authority [the regulatory body for subsea mining] for finalisation of the Exploitation Code, (July 9, 2023).”

We warned that based on a US$22 million quarterly cash burn, those numbers didn’t add up, and we warned that The Metals Company would need additional funds no later than May 2023 (here). The decision to proceed with an At The Market offering to raise up to US$30 million shows we were right.

In its results for the quarter ending September 30, which The Metals Company announced in November, it reported another net loss of US$27.9 million and cash in hand of just US$66.9 million, including the US$30 million raised in the August rights issue.

Core shareholders may exit

What is more alarming (or perhaps more hilarious, if you have been following the slow-motion train crash of this investment vehicle) is that in a prospectus known as an S-3 filing issued on October 22 and amended on November 25 (here), the company announced many of its core investors were actively seeking to sell their shares in the company. Oh no!

Since you are all busy people, it is worth highlighting the table on page 10 of the amended S-3 form to show exactly who has issued notice that they may be selling shares in The Metals Company:

Many readers will be thinking of rodents and maritime vessels in distress, possibly. Perish the thought, you cynics!

There are another fifty potential sellers listed on page eleven. The full list of shareholders who assert their right to sell is an eye opener. We presume the Ben Shapiro referenced is not the shrill, right-wing YouTuber.

Going through the list of investment entities many of them are operated in tax havens with opaque structures, including a company called Blue Dragons in Liechtenstein. Quite why such a charitable philanthropist as millionaire Brian Paes-Braga needs to hold some of his shares in a company registered in the Cayman Islands is not clear, either.

Quibbles aside, is it reassuring to investors that CEO Gerard Barron will be potentially selling 22 million shares, five per cent of the company, worth a cool US$17 million at the December 31 closing price? When The Metals Company listed at US$10 per share, his stake was valued at a quarter of a billion US dollars, but most of us would be happy with US$17 million, I suppose.

His family members Charlote (sic) Barron, Claudia Barron, and Lydia Barron were also all offering an identical 136,832 shares for potential sale under the S-3 prospectus.

Dr Gregory Stone is the former Executive Vice President of Conservation International. He is a man who claims to be one of the world’s leading authorities on marine conservation policy and ocean health issues (here). He is also the Chief Ocean Scientist at The Metals Company. At the time of the company’s listing in 2021, he would stand to make an eight-digit personal fortune from his shares and special shares in the company.

Do you think that these thirty pieces of silver might have led him to forsake a career in conservation to work for a company that is now slated by both Greenpeace and his former employer Conservation International? Indeed, in 2020 Conservation International called for a ten-year moratorium on The Metals Company’s projects (here).

If you are going to sell out the principles of the conservation body you worked at for nearly ten years, you may as well go all in. No surprise then that Dr Stone is currently also vice chair of the World Economic Forum’s Global Council on Ocean Governance.

I hear Davos is lovely when the WEF meets.

Maersk and Allseas holding the baby

Two well-known marine companies have been very hard-hit by The Metals Company’s share price fall. Allseas and Maersk Supply Service have been providing services to The Metals Company and to DeepGreen Metals, its predecessor company, chartering vessels and performing work in return for shares, or warrants to buy shares few pennies, rather than cash.

When The Metals Company listed at US$10 a share, it looked like they were geniuses. Now that the stock has fallen more than 90 per cent, both Maersk and Allseas have a large pile of pieces of paper, but selling such large blocks of shares will undoubtedly depress the share price further. They are caught in a Catch-22.

Maersk is the third largest shareholder in the whole of the company with 33 million shares and special shares. As a small part of the massive A.P. Moller-Maersk Group, the share price fall is irritating but not fatal.

Swiss-Dutch construction company Allseas is the second largest shareholder with the S-3 form showing it holds 42 million shares and special shares, many of which it just received for meeting an operations milestone. Allseas is the owner and operator of the converted drillship Hidden Gem, which is the mothership The Metals Company plans to use for the collection of the subsea minerals in the first phase of its operations. A note in the filing shows that on March 4, 2021, DeepGreen issued a warrant to Allseas Group, which vested as of November 11, 2022 upon The Metals Company’s Board of Directors’ determination of the successful completion of an unnamed operation. As a result, Allseas received warrants for 11,578,620 common shares at a purchase price of $0.01 per share. The Allseas Warrant expires on September 30, 2026. The company might be well advised to exercise them promptly.

The S-3 filing went on to say that the total of 42 million shares and special shares held by Allseas “does not include an aggregate of 10,850,000 common shares, the company intends to issue to Allseas Group as the third and final US$10 million milestone payment as described in the original and amended Pilot Mining Test Agreement and a US$850,000 payment for additional costs related to the successful completion of pilot collection system trials.”

Mr. Edward Heerema, the Administrateur President of Allseas, has sole authority over Allseas, the filing reminds us. Allseas is private and does not publish its financials, so it is hard to assess the impact of the stock price fall on the Allseas balance sheet. Hidden Gem was converted for specific use as a deepsea mineral collection vessel. The travails of The Metals Company leave Allseas exposed – the unit requires large amounts of cash to operate and it cost large amounts of cash to convert from its prior role as an oil and gas drillship.

Allseas has the proven technology to extract the nodules and a unique asset in Hidden Gem but none of this is worth anything unless it can find a way to convert its operational know-how into cash. Holding a large share in The Metals Company, an entity that can only survive by issuing more new shares, diluting Allseas’s holding – and depressing the value of its shares – is not a long-term solution for Allseas.

What will happen next?

The main blessing of The Metals Company is that it is debt-free. In the coming years, the company is going to need billions of dollars of capital to achieve its ambitions to hoover up the millions of tonnes of polymetallic nodules it wants to collect from the seabed. The future is endless cash calls, until there is a sale of the company.

One solution would be to sell to a ruthless government like China or Russia, which would not need to worry about the environmental activists and pesky critics, and could suck up as many nodules as it wanted however it chose, as long as the International Seabed Authority was happy to go along. A sale of a mining company to China was how Brian Paes-Braga made his fortune before he invested in The Metals Company.

Geopolitics makes that outcome impossible today, however.

Read the small print

My view is that the likely answer lies in the small print of the November Prospectus. The Metals Company says it has key strategic alliances Allseas, and with a second company…

“Glencore International, or Glencore, which holds offtake rights to 50 per cent of nickel and copper production from the NORI area..”

Hmm… and Glencore already holds three million shares in the company as per the S-3 filing.

At The Market or On The Market?

As we reported here, Glencore made US$18 billion of free cash flow in the first half of 2022 and had a market capitalisation of US$84 billion on the last trading day of 2022. The Metals Company is worth less than US$200 million in total (less than 0.25 per cent of Glencore). At some point one of the big mining companies is likely to step in, hand Mr Barron some money to shut up and go away, and take over the company – if only for the option value of its subsea concessions.

From Allseas’ and Maersk’s perspective, this would be an excellent outcome, as it would give them a much more solid counterparty, a customer that could pay them in cash rather than Mr Barron’s magic beans and millions of increasingly worthless shares in The Metals Company.

Watch this space. Rather than selling shares At The Market, I suspect The Metals Company will find itself on the market in 2023, reduced to clear to a serious, well-capitalised mining company.

Out with the old and in with the new!

Background Reading

You can view all our previous coverage of The Metals Company in the Baird Maritime archive here.

The actual number of common shares issued by The Metals Company under the At The Market offering will vary depending on the sales price and timing, as this is a very flexible process. The arrangement permits the company to sell new shares into the market in dribs and drabs, without requiring the approval of the shareholders and without prior disclosure. See here for a guide on how At The Market offerings work.