This Stock Trades at a Fraction of Its Own Projected $23.6 Billion Value. Here's Why the Market Isn't Buying It.

The Metals Company (NASDAQ: TMC) conducted two studies to determine the resource potential of its exploration license areas in the Clarion Clipperton Zone (CCZ) in the Pacific Ocean. They found that it's sitting on 1.6 billion tonnes of potential resources, with a combined net present value (NPV) of $23.6 billion. Despite that massive resource base, The Metals Company currently has an enterprise value of around $2.1 billion, implying it trades at a fraction of its resources' projected value.

Here's why the market isn't currently valuing this metal stock anywhere near the full value of its resource potential.

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Drilling down into its resource potential

The Metals Company holds exclusive rights to explore and extract polymetallic nodules (pending permits) from license areas in the CCZ. These nodules are small rock formations, about the size of potatoes, lying on the seafloor. They contain nickel, copper, cobalt, and manganese, critical metals used in electric vehicle batteries and stainless steel.

It conducted a world-first pre-feasibility study of one specific sub-section of its license, which confirmed a resource base of 363 million tonnes. These resources have an NPV of $5.5 billion at a 27% internal rate of return (IRR), assuming a capital-light development approach. Additionally, it conducted a less rigorous initial assessment of its other license areas. They contained nearly 1.3 billion tonnes of resources, yielding an NPV of $18.1 billion at a 36% IRR, assuming a contracted development approach.

Why the market isn't fully buying into its resource potential

The Metals Company currently trades at about 8% of its SEC-compliant $23.6 billion NPV. Its management team believes it's highly undervalued relative to the 58% average discount applied to companies exploring for and developing nickel resources.

There are two reasons for this major disconnect. First, The Metals Company is doing something no other company has ever done before. It's trying to extract polymetallic nodules from the ocean floor and is currently seeking a permit to begin extraction. However, it's seeking approval from the National Oceanic and Atmospheric Administration (NOAA) rather than the International Seabed Authority. This move could cause international issues due to intense environmental opposition. Even if it receives a permit from NOAA, the company might still lack the legal authorization to proceed with extraction.

The other issue is its financial situation. The Metals Company ended the second quarter with about $143 million in liquidity. Its cash burn rate was $20.1 million in the second quarter, raising a potential future funding issue. It's currently seeking additional funding from the U.S. Government to build nodule-processing and refining capacity in the country.

Risks are weighing it down

The Metals Company is sitting on a potentially massive resource in the Pacific Ocean. If it wins legitimate approval to extract these highly valuable polymetallic nodules, its stock has significant upside potential as the valuation discount narrows. However, there's a real risk that even if it received a permit from NOAA, it won't be able to proceed with extraction. That sets it up for a potentially expensive legal battle, not to mention the costs of continuing to operate and develop its processing and refining capacity once it finally receives all the necessary approvals. These risk factors are why The Metals Company will likely continue to trade at a meaningful discount to its resource potential.

Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.