Carbon Streaming Corporation
Q2 2022 Earnings Call Transcript

Published: 15 Feb 2022

[Company Representatives:]

Justin Cochrane - Chief Executive Officer Geoff Smith - President, Chief Operating Officer Conor Kearns - Chief Financial Officer Anne Walters - General Counsel Mike Psihogios - Chief Investment Officer

[Operator:]

Welcome to the Carbon Streaming Quarterly Financial Update. Please note that all lines are in a listen-only mode. After the presentation we will open up the call for questions. . Please note that this call is being recorded today, Tuesday, February 15, 2022 at 11

[Justin Cochrane:]

Thank you very much, and thanks everyone for joining our second quarterly conference call. As the operator noted, the call is going to be recorded and available on our website for a couple of weeks. Well I think we’ve got a few 100 people registered, so thanks for taking the time out of your day to join the call. With me today is the rest of the Management Team. We’ve got Geoff Smith, the President and COO; Conor Kearns, our CFO; Anne Walters, our General Counsel; and Mike Psihogios joining by phone is our Chief Investment Officer. So I just wanted to touch on a couple of highlights before I turn the call over to Conor to walk through some of the financial results. But very busy quarter for the company and really setting ourselves up for a very busy and productive 2022. So first off, we closed our MarVivo Streaming investment that gave us the right to purchase the greater of 200,000 credits or 20% of MarVivo’s annual credit generation. A few of us also had the pleasure of visiting MarVivo in late last year and I can tell you that we were extraordinarily impressed with the quality of the team and the quality of the projects. So very excited for that project as it’s being developed now and will be developed over the next 12 to 18 months. Secondly, we did upgrade our OTC listing to the QB market and of course have continued our work towards an uplisting in the U.S. to a big board listings, so stay tuned for that. We consolidated the stock or finished the consolidation of the stock on a 5-for-1 basis – sorry, 1-for-5 basis and that of course was done for this U.S. uplisting that we’ve talked about for several months now and we’ve continued to build the team. We talked last quarter about the addition of Geoff and Derek to the management team, but we’ve also added two very highly experienced female board members, Candace MacGibbon and Alice Schroder and are very excited to have both of those joined the board here in the last quarter of the year and Alice just joining earlier this year. And then finally, we did just recently provide some guidance for 2022 and that guidance was the expectation for the delivery of 5 million to 5.6 million attributable carbon credits to our account, with ongoing delivery payments back to our project partners of 75% to 85%. So what does that mean for us? It means carbon streaming will be retaining or expected to retain somewhere between 15% and 25% of the sales price once those credits are delivered. And those deliveries are expected from our Rimba Raya project in Indonesia and our ERA Cerrado Biome project in Brazil. So with that, I will pass the call over to Conor Kearns to walk you through some of the financial highlights.

[Conor Kearns:]

Thank you, Justin, and thank you to all participants for tuning in. Before we continue, the company uses non-IFRS measures in some of its reporting. Such measures include adjusted working capital, adjusted net income and adjusted income or loss per share. Management believes that these non-IFRS measures, together with measures prepared in accordance with IFRS provide useful information to investors and shareholders in assessing the company's liquidity and overall performance. Participants are encouraged to review the disclosure around these non-IFRS measures in the company's management's discussion and analysis for the quarter ended December 31, 2021. All financial information is presented in United States dollars unless otherwise indicated. Now moving on to the company's financial statements, management's discussion and analysis and financial results and events for Carbon Streaming’s second quarter ended December 31, 2021. At December 31, 2021 the company had $103.9 million in cash and no corporate debt. For the six months ended December 31, the company invested in carbon credit streaming investments and strategic assets totaling $62.2 million. As a result of the continued strength of the company's share price and its impact on the calculation of warrant liabilities and related revaluation of warrant liabilities, the company's Canadian dollar denominated warrants, which the company views as having a significant non-cash impact on the company's working capital, net income and loss and net income and loss per share calculations. The company prefers to use adjusted measures which removes the impact of the warrant liability and revaluation of warrant liability amounts. At December 31, the company had a working capital deficit of approximately $300,000 or as on an adjusted basis the company had an adjusted working capital of $104 million. The company incurred a net loss of $47.3 million for the quarter, primarily due to a $40.9 million non-cash charge related to its revaluation of warrant liabilities. Adjusted net loss, which removes the impact of the warrant liabilities revaluation was a loss of $6.4 million. For the six months ended December 31, the company received $1.3 million from the exercise of warrants and options. During the six months ended December 31, 2021 the company had several notable events. On July 19 the company closed its $105 million equity raise. Effective July 1, as a result of the significance of the July 19 equity raise, the company determined that its functional currency had changed from Canadian dollars to the United States dollar. In connection with this, the company also changed its presentation currency from Canadian to U.S. dollars. On July 27, Carbon Streaming commenced trading on the New York Exchange under the symbol NETZ or N-E-T-Z. The company's securities commenced trading on a post consolidation basis on October 25. The consolidation was implemented on the basis of one post consolidation common share for every five pre-consolidation common share, 1-for-5. On November 18 the company confirmed that it has closed its previously announced Blue Carbon Credits streaming agreement with MarVivo for the MarVivo Blue Carbon conservation project in Magdalena Bay, Mexico. On November 20 the company's previously issued special warrants automatically converted into 21 million shares and 21 million warrants. As of December 31, the company had 46.6 million common shares and 33.4 million warrants outstanding. On November 22 the company's upgrade - the company upgraded its OTC listing to the OTCQB market under the symbol OFSTF or O-F-S-T-F. That concludes the summary of the quarterly results and significant events for Carbon Streaming for the quarter ended December 31, 2021. Now, I would like to pass it over to our President and COO, Geoff Smith.

[Geoff Smith:]

Thanks Conor. I'm going to talk to you about our current investments and our pipeline that we continue to work towards expanding. We've assembled a high quality diversified portfolio of stream investments and continue to actively growing and assess and evaluate new opportunities. In terms of our existing assets, Rimba Raya is our largest investment to-date. That is a project in Borneo, Indonesia which concerns over 64,000 low land peat swamp forests and also protects the critically endangered Bornean orangutan. This is a particularly special project as it is one of the largest REDD+ projects in the world and importantly the only project verified to meet all 17 United Nations Sustainable Development Goals. Such as the impact of this project among others in our portfolio is far greater than purely the climate benefit. Justin mentioned our ‘22 our expected guidance. Rimba Raya represents the majority of the credits we expect to take delivery of during the calendar year, and currently we're on track for our next verification cycle in the first half of 2022. Importantly, this verification cycle represents two years’ worth of credits, which is effectively a catch up for an annual verification which skipped during the pandemic due to travel restrictions. Our MarVivo Blue Carbon project in Mexico as Justin mentioned is a particularly special place and one we are very excited about as it represents organic growth and the addition of Blue Carbon credits to our portfolio. Blue Carbon importantly trades at a notable premium to otherwise terrestrial REDD+ based projects and even greater premium to a base carbon credit like the GEO. This project protects 22,000 hectares of mangrove forests and over 137,000 of marine habitat in Baja, California. First issuance to this project is expected in the first half of 2023. Our Cerrado Biome project is one that expects near term issuance of credits, the inaugural issuance again in the first half of this year and that makes up the balance of our 2022 guidance at the moment. This project is an Avoided Planned Grassland Conversion project, also REDD+ located in the Cerrado biome of Brazil, which is considered the breadbasket of Brazil. This is one of the most Bio diverse savanna regions in the world. This project is one we expect approximately 100,000 credits from on an annual basis going forward. The lastly investments we made to-date is the Bonobo Peace Forest. This comprises two separate projects, Sankuru and Kokolopori. These projects are significant in scale, measuring approximately 3.5 million hectors, located in the Democratic Republic of Congo. Given the size of these projects, they have the potential to be meaningful contributors to our portfolio in the future. During the quarter, Carbon Streaming amended our exclusive term sheet with our partner, the Bonobo Conservation initiative to increase up front funding to 1.3 million. This relates to an exclusive term sheet we have, in which terms of any definitive agreements will be forthcoming once initial feasibility study work is completed, and that work remains ongoing. In terms of our pipeline, we continue to have ambitious growth plans and actively seeking to deploy the current cash balance we have. As it sits today, we seek to grow the diversified portfolio in which we have identified 200 million of near term investment opportunities, which represent a portion of a larger portfolio, longer term opportunities totaling over 700 million. Again, you know as we move forward we expect to be able to continue to grow the business through this active pipeline which grows by the day. In terms of carbon markets, a quick update. We saw continuing pricing strength during the quarter, importantly greater awareness within the markets. The number of companies pledging net zero ambitions increased dramatically, all centering around the COP26 conference, which really was a crucial moment in highlighting the necessity of a medium drastic action need to fight climate change. Pricing right now as it stands, nature based credits are trading at approximately $15 a ton, a notable premium to the global mission offset, which while it increased significantly during the year trading at $7 a ton. We expect continued strength in the market as climate change continues to increase importance of agendas, both from corporates, governments and individuals. I now like to pass the call back to Justin.

[Justin Cochrane:]

Thanks Geoff and Conor. Just a couple of notes before we open it up to questions and we've seen tremendous interest in carbon credits and investing in carbon credits pick up here over the last couple of quarters. I'd say you know both from the investment community, from brokers and institutions, we've had some research coverage picked up on the company which we're very thankful for and expect to have a few more additions to that here in the coming months. But from a company perspective, we believe that we've got a really nice head start in this industry, we've got some flagship assets that form the foundation of the company here over the next few decades and we've invested heavily in the teens as you see from the people on this call. But we do have now seven full time people working on our investment team outsourcing, negotiating, executing agreements for us, so very excited about the year ahead. Feel like last year we put the building blocks in place for the next several decades for this company and very enthusiastic about where things are headed. So again, thanks for your time today and we're here for questions and if you don't want to answer or ask a question publicly, feel free to please reach out to us through the website or our emails if you have those. So thanks again and operator happy to take some questions.

[Operator:]

. And your first question comes from the line of David Quezada with Raymond James.

[David Quezada:]

Thanks. Good morning everyone. My first question here, Justin you touched on some new additions, some new hires you made to the team. I'm just curious if you could discuss what those individuals will be focusing on as they dig in with the company and does that maybe signal a broadened focus into other types of carbon offset projects in the future.

[Justin Cochrane:]

Yes, thanks David. So as I was mentioning before, heavily invested in the management, both in the management team with the addition of Jess as I talked about in early October, but also the investment team. So Mike Psihogios who is on the call runs a large investment team now and I expect it will continue to make a few investments and new hires into that team. The focus for us is on building a diversified portfolio across not only geographies, but also a number of different project types. So while we have a handful of REDD+ projects in the portfolio today. We are very focused and have a number of opportunities sort of outside of the REDD+ space as well. REDD+ space for those who aren’t familiar, is an acronym for the Reduction in Emissions from Deforestation and Forest Degradation. So it really is an acronym for forest conservation projects globally and so everyone of the five projects that we have is a forest conservation project or a peat swamp conservation or a mangrove conservation project today, but very focused on building the portfolio outside of that space and that's part of you know David to your question, part of why we continue to sort of build the team and add to the capabilities of the management team and the investment team.

[David Quezada:]

Excellent! Thanks Justin, that's great color. My next one here, just with respect to some of the comments you made around the strength in carbon credit prices recently. I'm just curious if you can compare, say the conversations you're having I guess on both sides with end buyers and project developers today. How have those discussions changed over the past six months as carbon credit prices have going higher. Do you get the sense that there is an increasing level of urgency on the part of buyers and I guess developers as well to move forward on projects, you know ahead of potential further carbon credit appreciation.

[Justin Cochrane:]

So yes, in terms of the buyer universe for our existing projects, I do get the sense of urgency, but also this market has changed so much in the couple of years since we launched the company in the sense that there's clearly a supply/demand gap that exists now, and as most people will be aware. These projects, as you develop new projects can take 18 months to three years to properly go through the validation and verification stage. So there is some urgency that we see from buyers. That's part of the reason why we've seen the price increase as much as it has in the past six to 12 months. I don't expect that to alleviate any time soon and from a project developers, I mean certainly we see with the increase in price, you know new projects and more new projects that are coming out of the woodworks, which is fantastic. I mean this industry needs hundreds if not thousands more projects to be developed if we're going to fight climate change the way we need to over the next couple of decades, and that presents opportunities for us. Obviously it’s a financing vehicle and we’ll certainly increase supply of credits as the demand increases, you know as awareness for fighting climate change also increases.

[David Quezada:]

Excellent! Thank you for that and then maybe one more from me. Just as you as you receive the credits from Cerrado and Rimba Raya later on this year, I’m just curious how much latitude you have to hold on to them, given you know whatever price signals you might see is short term in the market or will you look to deliver those to or sell those end buyers very shortly after you receive them?

[Justin Cochrane:]

We work with our project partners to craft a sales plan and so it’s a – as you can imagine, because 75 is our guidance, 75% to 85% of the revenue is going back to our project partners, it's a very sort of active discussion that we have with each partner, so – and each has their own objectives. For the company though, we do have flexibility to hang on to credits, to maximize pricing if we do see pricing you know moving up. That being said, as a company we get our leverage through the longevity of our investments, right. We've got our projects, our 20/30, in some cases 40 and even 60 year lives for some of the pipeline projects. So we don't anticipate inventorying credits for any significant length of time. We get that leverage to the price through the longevity of the contract. So you would see us, as an example, if we have delivery of Rimba Raya credits, we would endeavor to sell those over the following 12 months preceding the next annual delivery, you know as credits tend to be delivered on an annual basis.

[David Quezada:]

Okay, excellent! Thanks for that. I’ll get back in the queue.

[Justin Cochrane:]

Okay, thanks David.

[Operator:]

And your next question comes from the line of Brett Reiss, Janney Montgomery.

[Brett Reiss:]

Yeah, hi! New to this situation. Thank you for letting me ask a question or two.

[A - Justin Cochrane:]

No problem. Hi Brett!

[Brett Reiss:]

Hi! The maturity of the carbon credit market, is it – you know once you inventory them, are you at the mercy of the spot price or is there a futures market, which you know would enable you to be able to hedge your inventory?

[A - Justin Cochrane:]

Yeah, it's an excellent question Brett. So we – so both. You’ve got the opportunity to sell credits into the spot market and you can enter into as many buyers look for multiyear commitments. I would say we’re reluctant to do those multiyear commitments at fixed pricing today, just given the strength in the market, but could see us doing some multiyear volume based commitments. But for the most part we are looking to sell our credits at spot price. We're looking and our investors are looking for spot exposure to carbon prices, so we're not looking to hedge forward too much of that ongoing exposure.

[Brett Reiss:]

Okay. Is your main competitive advantage the quality of the team you're assembling, you know to be able to crunch the numbers and deploy the capital in you know the best way?

[A - Justin Cochrane:]

So that would be part of it Brett, it’s the team. I would also say we do have a massive head start as we've been doing this for several years now. The cash position that we have of over $100 million is a significant competitive advantage and having been at this for several years, just that the pipeline of opportunities that we have, so we’re – you know and then partnered with a number of industry experts and you will have seen through our partnership with InfiniteEARTH and strategic alliance with InfiniteEARTH that we've aligned ourselves with some fantastic project developers where we see you know additional opportunities in the years to come, coming from that strategic alliance as an example, so. But in a team, from a team perspective, a team that has built several royalty streaming in investment companies over the past couple of decades, a team with you know decades and decades of carbon experience, so we feel like we're extraordinarily well placed to keep building this company.

[Brett Reiss:]

Right, right, and just one last one if I may. Is there a line of sight when you will be cash flow breakeven and what is your SG&A, you know annualized run rate?

[A - Justin Cochrane:]

Yeah, so we haven't sort of provided guidance on cash flow to-date, just given the early stage of the company and as we continue to build out the investment portfolio. So our reserve is sort of commenting on an exact timetable for a cash flow break even, but as you'll see with the number of credits that were expected to be delivered this year from our project partners in the carbon, the existing carbon price, we expect to have a very sort of healthy level of cash flow this year. So again, it puts us in a big sort of competitive advantage I believe, just given the quality of the credits that we have coming in. So, I hope that – it's a bit of a non-answer Brett, but – and then from a G&A perspective, I don’t know Conor, we're sort of running probably around $2 million a quarter, somewhere in that neighborhood today.

[Brett Reiss:]

Okay. Thank you for taking my questions.

[Justin Cochrane:]

Thanks Bret. Take care.

[Operator:]

And your next question comes from .

[Unidentified Analyst:]

Hi! Thanks for taking my question. In your MD&A, you mentioned that 2011 guidance was not met and you would not be using this metric going forward. Is this regarding the target of reaching 100 million credits by 2025, and if not, could you please explain what that was referring too?

[Justin Cochrane:]

Yeah Safar , you’re exactly right, that's exactly what I was referring to. We feel like where the guidance for the number of delivered credits and the delivery payment that we continue to make to our ongoing partners is a far more useful guidance metric going forward. And as we you know continue to build out the investment portfolio, obviously the hope is that that will continue to expand. So it's a bit more similar to what this industry does in the mining and energy space, talking about delivery of credits and that ongoing payment. So we wanted to be consistent with that, and again believe it's a far more useful metric for people to calculate the cash flow and revenue of the company on an ongoing basis.

[Unidentified Analyst:]

Understood. Just following up on that, if you can explain what has changed regarding kind of calculating those credits or why this was impacted and two, how should we going to think about long term outlook regarding Carbon Credits?

[Justin Cochrane:]

Well yeah, I wouldn’t say anything is changed. I mean the reason for the previous guidance and talking about the number of credits in the portfolio is to clearly guide people towards the fact that we expect to continue to make a number of new investments and it’s a reason why we talk about the pipeline and if talked about the pipeline, it's sort of a central focus of the investment presentation. So I am very, very encouraged about the way the pipeline is shaping out and still very, very bullish on our ability to continue growing the company. So nothing’s changed from that perspective so far.

[Unidentified Analyst:]

Understood! Thank you.

[Justin Cochrane:]

Thank you.

[Operator:]

Your next question comes from the line of Christopher Heiser . He is a Private Investor.

[Unidentified Analyst:]

Good afternoon Justin from Barcelona, where I'm on business and thanks for taking the call. Two quick questions; first is, are we on track for a U.S. big board listing in the second quarter and the second would be, do you anticipate – haven't raised anymore capital within the next 12 to 24 months. Thank you.

[Justin Cochrane:]

Thanks Christopher, and I'm totally jealous that you are in Barcelona, but hopefully you're having a great time. It’s one of my favorite cities. So in terms of the U.S. listing, yes. We were saying the first half of this year, we're actively working on that application right now for an uplist. Although we can't specifically comment on the timing we’re – I’m quite hopeful that happens over the next several months. And sorry, what was the second part of the question?

[Justin Cochrane:]

Just financing. Yeah, so I think the simple answer on financing Christopher is, yes, we’ve got $100 million of cash. On the balance sheet now we've got a large investment pipeline, which we anticipate deploying into, deploying that cash into. So I would expect at some point later this year we would be out raising additional capital. We do have several different avenues for that capital and expect that we will have announced a number of new investments, obviously prior to that additional capital raise. So the commitment from the management team obviously would be accessing the cheapest form of capital for our shareholders and of course, you know evaluating that along with the risk profile of any capital that we are taking. But what you will see from streaming and royalty companies is we are consumers of capital as we continue to grow and diversify the pipeline. So that would be our intention as well.

[Unidentified Analyst:]

Very well, I appreciate it. And one last question, do you see any – in terms of that capital rate, do you see any interest rate risk within that next raise?

[Justin Cochrane:]

So, I think simple answer is, no. I don't expect any additional, the next capital raise to be interest rate based if you will. Of course if it’s an equity offering, you are at the mercy of the markets, which can be impacted by global interest rates. But no, we are – I think the bigger factor for the company of course will be the investment that we continue to add into the pipeline and where carbon markets move over the next 12 months. But we still as I said feel very good about how that pipeline is shaping up.

[Unidentified Analyst:]

Great! Thank you. I appreciate it Justin. Thanks very much, muchas gracias.

[Justin Cochrane:]

Thanks Christopher and take care.

[Operator:]

. And there are no questions at this time. So I’ll hand the call back over to Mr. Cochrane.

[Justin Cochrane:]

Listen, thank you again very much for joining our second quarter conference call, and please feel free to reach out to us if you have any additional questions and thanks again for joining and we’ll take you again in three months.

[Operator:]

Thank you for participating. This concludes today’s conference call. You may now disconnect.