COLUMN | The Metals Company raises cash to stay afloat [Offshore Accounts]

Ah, Gerard Barron, Chairman and CEO of The Metals Company! My column would “suck without you,” as pop star Kelly Clarkson once put it (here). In the words of that song, “I know that I’ve got issues, but you’re pretty messed up too.”

Quite how messed up was revealed last week when The Metals Company announced its second quarter results (here), a stonking loss of US$12.4 million. According to the company’s own presentation, the main cause of the loss being less than that of the year before was “a US$9.6 million decrease in share-based compensation” compared to the second quarter of 2021.

That quarter in 2021 had been just ahead of the predecessor company DeepGreen Metals’ merger with a special acquisition company to list on the New York Stock Exchange. Clearly, the senior management felt that their unique talent for managing to pull off the listing deserved to be rewarded with a shedload of shares issued to themselves. This quarter, fewer executive snouts were in the corporate trough, which is starting to look a little empty.

Cash burn accelerates

Unfortunately, in 2022, much of the money that the company obtained through merging with the cash holding shell company was burnt in operations. Around US$22.7 million in cash was used in the April to June 2022 period, up from less than US$8 million in the year before. The Metals Company had US$46 million in cash on hand on June 30 – barely enough to last it to the end of the year, based on the cash burn in the April to June quarter.

We had earlier warned (here) that The Metals Company’s ongoing cash burn meant that a capital raising was inevitable, and that existing shareholders should prepare to be diluted.

Guess what? At the same time as announcing the bad news of the quarterly losses, Mr Barron was on hand with some good news – the company had raised US$30 million from a private placement of 38 million new common shares to investors, investors who included himself and his own family (here).

The new shares were all priced at US$0.80 a share, except for those sold to Mr Barron, who bought in at US$0.9645. The penny stock, which is down over 90 per cent in less than a year, closed at US$0.89 per share last Friday, August 19.

Now cash will last a year?

Mr Barron claims that this infusion of extra capital is 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).”

Based on a US$22 million quarterly cash burn, these numbers don’t quite add up, and The Metals Company will need additional funds no later than May 2023, I would guess. Even if it can commence operations on July 9, 2023, in theory, The Metals Company is unlikely to be able to proceed with any wide-scale nodule harvesting in the face of environmental concern.

The costs of operating its mining equipment full-time on location in the Clarion-Clipperton Zone of the Pacific, if this is allowed to happen, will lead to a massive increase in cash requirements, as crew and fuel costs will soar, and additional vessels are required to supply the mothership, and transport any nodules harvested. The Metals Company simply doesn’t have the ability to fund an operation of that scale with its market capitalisation of around US$200 million, and (maybe) just enough cash to get it through the next twelve months.

We now bet that a new cash raising exercise will be required in early 2023, further diluting existing shareholders. Or the company will be sold.

Watch out for Caspar!

The environmental concerns about the impact of sucking up thousands of tons of nodules, which have lain undisturbed on the abyssal plain of the Pacific Ocean for millions of years, are just not going to go away.

The International Seabed Authority has still not managed to agree the environmental rules and regulations governing deepsea mining. It is highly unlikely to do so by July 9 next year, even if The Metals Company and its sponsor state Nauru try to push through their programme.

The ongoing public interest and scientific research into the deepwater Pacific Ocean where the polymetallic nodules will be hoovered up by The Metals Company’s robotic collection devices reveal just how little we know about the areas where Mr Barron’s company intends to operate. The charismatic looking and very photogenic ghost octopus, which has been found in waters 4,200 metres deep off Hawaii, and which is believed to nurture its eggs for up to four years, may yet be the most powerful enemy of subsea mining in the Pacific Ocean (here).

Expect those opposed to deepsea mining to be increasingly forceful that Caspar and his kind need their eco-system and life-cycle to be further studied and understood before the nodules from the seabed are hoovered up by armies of robots and smelted down in furnaces to make battery metals.

Circular economy reigns

There’s also something circular about Mr Barron’s own investment in the company. He and his top executives received US$5.7 million in stock-based compensation in the first quarter. After his latest foray into the market to inject more cash into the company, Mr Barron now owns 18.8 million shares in the company, 7.1 per cent of the total stock, according to the SEC filing here. This gives him a stake worth just shy of US$17 million. Nice, but he’s no Marc Rich just yet (see here). The update on the funding mentioned that Mr Barron’s family also bought in as well, although it wasn’t clear how much cash they put in, which family members invested, or what the source of their funds were.

Approximately 70 per cent of the commitments for new money came from existing shareholders and insiders, including Allseas, which owns the mining mothership Hidden Gem, which it charters to The Metals Company as the primary platform for its efforts to harvest the nodules – presumably the funds that came in from the latest fundraising will be partly spent on chartering Hidden Gem. The vessel has been undergoing ever more rigorous tests on the seabed over the last year, and the more it works, the more The Metals Company in charter hire will have to pay.

Other investors in the new funding include ERAS Capital, which is the family office of The Metals Company Director Andrei Karkar, SAF Group Managing Partner and entrepreneur Brian Paes-Braga, and Front End Chairman and CEO Majid Alghaslan.

This is where the fun starts. Who are they?

Karkar family office

Andrei Karkar bought over six million new shares in the latest fundraising, taking his shareholding to over 20 per cent of The Metals Company, some 54,089,364 shares and warrants, according to the SEC filing (here). This stake is held personally and through ERAS Capital, the Karkar family’s investment company.

He is second-generation rich. His father, Edward Karkar, was a Palestinian refugee who fled to the US, made a ground-breaking career in science, and founded Karkar Electronics in 1959. Karkar Electronics was a pioneering telecommunications company in what would later become Silicon Valley. Karkar senior married a Soviet ballerina, and, as their only child, Andrei inherited the family fortune in 2013 when his father passed away (obituary here).

Andrei has bought into The Metals Company at various low points in its journey after listing, and has been consistently rewarded by the stock price trading lower afterwards. According to an SEC filing (here), Mr Karkar bought 460,000 shares at an average price of US$2.21 on March 30 of this year, and another 1.625 million shares at an average of US$2.46 per share on March 31, for a total of around US$4 million.

He also holds an interest in CognitionX, an Artificial Intelligence platform that offers a library of up-to-the-minute news, according to The Wall Street Journal (here).

Brian Paes-Braga, ex Lithium X

Brian Paes-Braga’s source of funds is easy to spot: China. In March 2018, he was CEO of Lithium X, and sold the Canadian mining company to a Chinese subsidiary of Tibet Summit Resources. Brian says (here on his own website) that he saw Lithium X as a way to fill a need in the resource market and that he wanted the company to pave the way for small-cap natural resource speculators to gain exposure to electric vehicles during the consumer electric battery boom.

Brian and his Lithium X team raised approximately CA$53 million (US$40.7 million) from investors before selling it to NextView New Energy Lion Hong Kong, a subsidiary of Tibet Summit, for CA$265 million in 2018 (then worth US$206 million).

Strange parallels

At that time of the sale, Lithium X didn’t actually produce any lithium, but like The Metals Company, it had secured licences to mine in areas believed to be rich in the metal. The parallels are slightly uncanny – Lithium X bagged some acreage, listed as a public company, made the pitch that the lithium contained in its licences would be worth a fortune as the world electrified, and then sold itself to a much bigger mining company – all without going to the troublesome effort of actually mining the lithium.

Brian does a lot of work for charity

“The day I got the call that the sale went through, my 30th birthday, was professionally the most euphoric moment of my life,” Brian has said.

Naturally, he had a humble background, and intends to use his wealth to “pay it forward” to future generations. This involved becoming a director of, and investor in, DeepGreen, the predecessor company to The Metals Company, as well as investing in Canadian-listed entertainment company Thunderbird, and writing a self-help book that you can buy on Amazon, called 8: Reflections on building Business+Balance.

Brian says he is equally inspired to share his wisdom with younger generations, “to help them navigate the ups and downs in their journey towards authenticity, meaning, and fulfilment…”

Naturally, he is proud to support charities and research groups through his private family foundation – Quiet Cove Foundation – which provides support for those in need. Quite who it supports is explained here.

“Brian believes that the current status quo in the charity space hinders innovation and growth. Charities are confined to old notions of overhead and percentages spent on things such as marketing. They believe that this creates an imbalance as charities are told to think big, act big, but operate small.”

No one can accuse The Metals Company of failing to think big, nor of failing to be charitable to its own top management team. Mr Barron receives a salary of US$861,620 as CEO at The Metals Company.

The Saudi Arabian connection

The final big investor in the private placement by The Metals Company was Front End Chairman and CEO Majid Alghaslan. He is a Saudi Arabian national and formerly worked for Saudi Aramco, the national oil company, until 2014, according to his Linkedin profile (here). He then founded The Front End Company, which has a website that is big on vision and small on details of what the company actually does (here).

In its own words, Front End is “focused on oil field services and renewable energy, information and communication technology, cyber security, building materials, infrastructure, industrial, maritime services, manpower, and real estate sectors in Saudi Arabia and neighbouring Arab countries.”

Unfortunately, the website fails to demonstrate any investments in these areas, although Front End did advertise on Linkedin for a port captain for guard boats for a Saudi Aramco contract, suggesting that Mr Alghaslan’s company might perhaps be doing business with his former employer.

So, that’s clear then. Any good western company with a charismatic founder and a business plan that involves burning through millions of dollars of investor cash needs a Saudi Arabian backer, as viewers of the Apple TV drama Wecrashed, about the train crash of the serviced-office start up WeWork amid outlandish behaviour by its founder Adam Neumann, will be aware (here).

The future?

The Metals Company’s stock has crashed since it listed through the merger a year ago. It has now had to raise more cash from its backers. It lacks the cash to begin meaningful polymetallic nodule harvesting in 2023, assuming that such seabed nodule gathering is permitted in July by the International Seabed Authority, which is not a given.

Mr Barron, Mr Karkar, and Mr Paes-Braga are all rich men who became wealthy on the back of previous successes, whether by being born to wealth, or selling interests in companies in which they held large stakes. The massive investments required by The Metals Company are likely to stretch the finances of its current major backers, however.

The company needs to find a buyer with deep pockets to fund its dreams, probably a state-owned company or a major miner like Glencore or Rio Tinto. Otherwise, the current backers could lose everything, as the investors in Mr Barron’s previous deepsea mining venture did. We leave the final comment to The Wall Street Journal here:

“The first time Gerard Barron tried to mine the sea floor, 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.”

That’s a reference to Nautilus Minerals, which was liquidated in 2019, after failing to mine the subsea volcanic vents of the Bismarck Sea off Papua New Guinea. DeepGreen, the predecessor to The Metals Company, managed to buy the polymetallic nodule licence Nautilus held off Tonga. From the wreckage of Nautilus, a phoenix rose, a new mining company also headed by Mr Barron.

As Kelly Clarkson put it here, What Doesn’t Kill You Makes You Stronger.

Background Reading

You can view all our previous coverage of the company in the Baird Maritime archive here.

Note that Baird Financial Group, which holds two million shares in The Metals Company (here) is in no way affiliated with Baird Maritime.

ERAS Holdings website is here.

Chinese media coverage of the sale of Lithium X to Tibet Summit is here.

You can review Lithium X’s historic financials on www.sedar.com.

More on the collapse of Nautilus Minerals here and here.