Should The Metals Company (TMC) Have a Spot in Your Portfolio?

Headquartered in Vancouver, Canada, The Metals Company (TMC) is a deep-sea minerals exploration company that engages in the mining of seafloor polymetallic nodules in order to supply metals for electric vehicle (EV) batteries. The company has exploration and commercial rights to three polymetallic nodule contract sites in the Pacific Ocean.

The company went public through a SPAC with Sustainable Opportunities Acquisition Corporation on the Nasdaq back on September 10th, 2021. The company’s cash on hand and proceeds from the SPAC deal are estimated to be about $570 million, which is expected to fund the company’s operations until the commercial production of battery metals as soon as 2024. 

Notably, the stock started trading at $8.80 on its debut and had rallied to an all-time high of $15.39 in the following days. However, the stock has since dropped substantially and is currently down 66% from its high.

Industry Outlook

Enhancing the technology around batteries is crucial to the advancement of the EV industry as well as alternative energy development. Without an efficient way to store energy, these industries would not be viable enterprises.

Consequently, companies have increased research & development expenses, aiming to develop more advanced batteries. Battery metals play a critical role in the cathode and other components of the battery composition, thus impacting its performance. According to Allied Market Research, the global battery metals market is projected to reach $20.5 billion by 2027, growing at a CAGR of 8.2% between 2020 – 2027. Increased demand for EVs and consumer electronics devices is projected to be the key drivers of growth for the battery metals industry.

Recent Developments

On September 28th, The Metals Company announced the start of its offshore research campaign, Environmental Expedition 5C. This program has a purpose to set a rigorous environmental baseline and estimate the impact of TMC’s activities “to source critical battery metals from deep-sea polymetallic nodules.”

Financial Overview

It is important to note the company hasn’t generated any revenues yet. The company plans to recognize its first revenues at least in 2024. 

However, the company’s exploration expenses and Selling, General & Administrative expenses (SG&A) increased by 76% and 1,638% to $54.74 million and $28.27 million, respectively, as of 1H 2021. As a result, its net loss stood at $83.7 million compared to a net loss of $32.76 million in the year-ago period. 

According to the company’s 8-K report, cash used to run the company’s operations during the first half of 2021 has been reported at $17.95 million, up 2.2% compared to the 1H2020 figure. With about $570 million cash on hand after the merger, the company should not face any liquidity problems for at least 24 months.

How much volatility are options traders expecting for the stock? 

Looking at the November 19th, 2021 option chain, we can calculate the expected price movement by utilizing the long straddle options strategy. Using this method, my calculations indicate that TMC’s stock could rise or fall by about 52% by the November expirations from the $5.00 strike price.  

In addition, let’s take a closer look at the number of open calls and put contracts. As of October 1st, there are 393 calls to 2,977 puts. This divergence suggests that options traders are currently bearish on TMC stock. 

The Bottom Line

I believe TMC stock is best to be avoided for now. While TMC should benefit from the battery industry’s growth in the long term, the company does not expect to generate any revenues until 2024.  In addition, the stock currently faces significant fluctuations in its price because of its popularity on Reddit among retail traders.