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Financials


The purpose of this financial analysis is to supplement the extensive research done by our partners and collaborators in their efforts to indict the deep-sea mining industry. Given that The Metals Company (TMC) holds the exploration rights which would allow for this novel form of extraction to begin, it is critical to interrogate whether the company has the resources or ability to realise this venture. The focus of this analysis will then centre around TMC’s financial standing, asking whether its position as an emerging growth company (EGC) on the public markets can withhold the risks associated with its business proposition. As TMC is pre-revenue, the company is reliant on forward-looking statements and speculative projections to attract investors. The forward-looking statements found in their SEC filings help colour the management team’s hopes, beliefs, expectations and intentions with regard to future development. These beliefs are given traction by the use of words like could, expect, anticipate and estimate. Speculation has the effect of distracting investors from the underlying financial mechanics which might allow for ventures such as TMC’s to succeed.  


Risk Assessment

To help clarify how TMC’s reliance on forward-looking statements implicates investors, we have developed a methodology which models how this reliance might translate to an elevated exposure to risk. The risk assessment methodology functions as a protocol and its inputs are easily swapped out depending on the intended output. A use case is represented above. Through our analysis, we identified four risks that will serve as inputs for the assessment protocol, risks that we believe investors must familiarise themselves with if they are to take positions in TMC. Below is the step-by-step process we used to assess and score these risks, providing samples from each individual assessment to clarify the methodology. To help gauge the level of risk for each assessment, we have employed a corresponding colour coded risk barometer. In addition, each risk is assigned a specific code to be inserted into a matrix for further evaluation. The output from the protocol is then used to assign TMC a credit rating. This rating is intended to invite investors to gauge the company’s probability of default, asking whether they deem TMC creditworthy in the face of their mounting risk profile.

Step 1: Identifying the Risks

This step was completed by assessing what is left absent from TMC’s narrative picture. The assessment resulted in our identification of four pressing risks and was made possible by uncovering vulnerabilities associated with the company’s financial standing. These vulnerabilities consist of: their presence on the public markets, the regulatory environment within which they operate, the pressure they face from external market forces, and their susceptibility to credit rating downgrades. Identifying specific risks regarding TMC’s financial exposure helps to fill in the gaps left open by the company’s reliance on forward-looking statements, equipping investors with pressure points to investigate further, while providing inputs to develop stress-tests of their own. The representation above illustrates the risk associated with investing in an Emerging Growth Company (EGC) such as TMC.

Step 2: Analyzing Evidence of the
Likelihood and Impact of Each Risk

The likelihood refers to the probability that the risk will occur, for example: what is the likelihood that TMC is adequately addressing ESG concerns? The impact refers to the consequences of the risk if it were to occur, for instance: the impact on shareholder value. This step was made possible by analysing the quantitative and qualitative data gathered from SEC filings, financial analysts, rating agencies, accounting reports, and ISA public records. By superimposing the data gathered from these sources onto TMC’s limited financial disclosures and anecdotal progress reports, we were able to evaluate the likelihood and impact of each risk. The representation above refers to the likelihood TMC is relying on its reduced reporting requirements to entice investors in the company’s future growth prospects. The representation below demonstrates evidence of the impact this would have on shareholder value.

Step 3: Score the Likelihood
and Impact of the Risk Identified

This step was made possible by analysing the evidence of the likelihood and impact of the risk identified. The score that the likelihood and impact are assigned corresponds to the strength of the findings and the credibility of the sources. The strength of the likelihood might refer to TMC’s ability to absolve themselves from disclosing quantitative and qualitative data about the company’s market risk exposure.[01] As this evidence is sourced from a U.S. Securities and Exchange Commission report and refers to a motion that was signed into law, the risk was assigned a high likelihood score. The strength of the impact could relate to TMC’s failure to advise its shareholders on the increased pressure they face from ESG regulatory initiatives[02][03][04], climate-related financial disclosure boards[05][06][07][08], or what Fed interest rate[09][10] hikes might imply for investors with positions in growth stocks. Given that market related risks are absent from TMC’s financial disclosures, the risk will be assigned a high impact score.

Step 4: The Risk Codes are
Plotted on a Matrix for Evaluation

This step was completed by first gathering the likelihood and impact scores of the four risks identified. These scores were then combined and plotted on a matrix. The difference in colour coding is meant to signify the overall impact of TMC’s risk exposure. The overall score for the four risks combined was evaluated on a scale of 0 - 100. This total was then used to assign the the company a credit rating. The result of the overall risk assessment could be gauged as TMC’s probability of default.

Open Assessment Tool
[DOWNLOAD HERE]

The document attached provides a detailed assessment of the most critical risks we have identified with regard to TMC's financial standing. The document provides a blueprint for the framework we used in our risk assessment and is intended to become an open-sourced working tool that can be developed further. Our hope is that our partners, collaborators and other concerned investors will adopt the framework to help contribute to the indictment of the company deemed most likely to unearth a non-existent industry.

"All of the above information are the opinions of the authors, and all effort has been made to ensure accuracy at the time of writing they do not constitute financial advice, or an investment recommendation. It is recommended you perform your own independent due diligence research before making any financial decisions"

01: “Spotlight on Jumpstart Our Business Startups (JOBS) Act” U.S Security and Exchange Commission. Accessed 17 Feb 2022. https://www.sec.gov/spotlight/jobs-act.shtml
02: “Key trends that will drive the ESG agenda in 2022” S&P Global. Accessed 17 Feb 2022. https://www.spglobal.com/esg/insights/key-esg-trends-in-2022
03: “Warren Buffet on why companies cannot be moral arbiters”. Financial Times. Accessed 17 Feb 2022. https://www.ft.com/content/ebbc9b46-1754-11ea-9ee4-11f260415385
04: “Deutsche Bank’s DWS Slumps After U.S., Germany ESG Probe” Bloomberg. Accessed 17 Feb 2022. https://www.bloomberg.com/news/articles/2021-08-26/dws-shares-fall-after-u-s-opens-probe-on-sustainability-claims
05: “Framework for reporting environmental and social information”. Climate Disclosure Standard Board. Accessed 17 Feb 2022. https://www.cdsb.net/what-we-do/reporting-frameworks/environmental-information-natural-capital
06: Financial Stability Board. Task Force Related on Climate-related financial discourses Bloomberg, 2021. https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf
07: CFA Institute. Global ESG Disclosure Standards for Investment Products.CFA Institute, 2021. https://www.cfainstitute.org/-/media/documents/ESG-standards/Global-ESG-Disclosure-Standards-for-Investment-Products.pdf
08: “Regulation S-K and ESG Disclosures: An Unsustainable Silence” U.S Securities and Exchange Commission. Accessed 17 Feb 2022. https://www.sec.gov/news/public-statement/lee-regulation-s-k-2020-08-26#_ftn13
09: “Interest Rates and Other Factors That Affect a Company's WACC” Investopedia. Accessed 17 Feb 2022. https://www.investopedia.com/ask/answers/070114/how-do-interest-rates-affect-weighted-average-cost-capital-wacc-calculation.asp
10: “Fed rate hike anticipation pushed investors into value stock over growth”. S&P Global. Accessed 17 Feb 2022 https://www-capitaliq-spglobal-com.gate3.library.lse.ac.uk/web/client?auth=inherit&overridecdc=1&#news/article?Id=68810450](https://www-capitaliq-spglobal-com.gate3.library.lse.ac.uk/web/client?auth=inherit&overridecdc=1&#news/article?Id=68810450