Carbon Streaming Corporation
Q3 2022 Earnings Call Transcript

Published: 17 May 2022

[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, May 17, 2022 at 11

[Justin Cochrane:]

Thanks very much operator and thanks everyone for joining our Q3 conference call. I'm joined today by Conor Kearns, our CFO; Geoff Smith, the President and COO; and Mike Psihogios, our Chief Investment Officer. I'd like to start by welcoming a few new team members. We have, since our last quarterly update call, we've had Oliver Forster join us as our VP of Sales and Andrea Cheung, join us just yesterday as our VP of Investor Relations. Both are incredibly experienced individuals, which I'm thrilled to add to our team. And expected that both will be extraordinarily busy here. And again, welcome them to the team. Also, just as a note, we do continue to work towards our US listing. We will provide further updates on timing as we move through the remaining regulatory steps. We don't have any definitive timing at this point, but you can be assured that it remains a large focus for our team. On our investment pipeline, the team has been extraordinarily busy. And I remain very optimistic about our ability to continue adding new projects and new project partners to our portfolio. And obviously, today, we're thrilled just in the last week to have two new additions to our portfolio, which Mike Psihogios will walk everyone through here shortly. But last week, we added our first biochar project, also our first investment in the US with , very excited about that project. And today, of course, announced our first lien cookstove and safe water projects. These are seven different projects in five countries in Africa, looking to provide millions of households throughout Africa with these vital devices. So very, very thrilled with those two investments. You'll learn a bit more about those from Mike. And before then, I'd like to pass the call over to Conor for a few remarks on the financial results.

[Conor Kearns:]

Thank you, Justin, and thank you to all participants for tuning in. Before we continue, a quick notice to participants that the company uses non-IFRS measures in its reporting. Such measures include adjusted working capital, adjusted net income or loss and adjusted net income or loss per share. Its 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 March 31, 2022. Additionally, all financial information is presented in US dollars unless otherwise indicated. Now moving on to a summary of the company's financial statements, management's discussion and analysis and financial results for Carbon Streaming’s third quarter ended March 31, 2022. The company recognized net income of $48.5 million for the quarter, which is primarily due to a $53.5 million noncash charge related to the revaluation of warrant liabilities for the company's Canadian dollar denominated warrants. Adjusted net loss, which removes the impact of the warrant liabilities revaluation, was a loss of $5 million. Similarly, for the nine months ended March 31st, the company recognized a net loss of $42.1 million again, primarily due to a $27.9 million noncash charge related to the revaluation of warrant liabilities. On an adjusted basis, adjusted net loss was a loss of $14.2 million for the nine months. As of March 31st, the company had $102.5 million in cash and no corporate debt. The company continues to be in a strong cash position and is very well funded for the transactions we have announced. As of March 31st, the company had working capital of $52.7 million whereas on an adjusted basis, which removes the warrant liabilities effect once again, the company had an adjusted working capital of $102.1 million. Now, I would like to pass it over to Michael Psihogios, our Chief Investment Officer.

[Mike Psihogios:]

Good morning, everyone. Thanks Conor for passing it over to myself. Excited to be announcing two investments here this morning. The first investment that I'll walk everyone through is our investment into Community Carbon. We're happy to announce a $20 million investment into Community Carbon. Community Carbon is a company who has been recently launched by the UpEnergy Group in 2022. The UpEnergy Group is a business that's been successfully operating since 2010, developing Carbon emission projects across Africa. The investment into UpEnergy we consider a very unique investment where we've structured a stream to cover a diversified portfolio of seven energy saving projects across five countries and been able to facilitate the Community Carbon growth plans of their business. This covers cookstove projects in Mozambique, Uganda and Tanzania, and also covers water filtration projects in Malawi, Mozambique, Uganda and Zambia. These projects will deliver approximately 3.5 million cookstove units and water purification devices. The projects will be registered primarily under both standard and the project in Tanzania will be registered under Verra. In total, this is going to be reducing approximately 50 million tons of carbon over the 15-year life of the projects. First credit is expected to be generated in 2023 and have a significant ramp up across all projects over the next 15 years. One thing we find very exciting about this project is that in conjunction with the launch of Community Carbon, we've also launched a Community Carbon fund. This fund is going to focus on the coal benefit activities at and related to the projects and have a particular focus on initiatives improving education, empowerment of women and girls, and this fund will be working on real projects from day one. In looking at this project from an overall basis, we see this as a multi asset, multi country stream and this project has been developed over the past 12 months working very closely with the UpEnergy and Community Carbon teams. In terms of pricing for these credits, the current market for household devices currently sells for over $10 a credit. We believe that the Community Carbon brand and Community Carbon team working with UpEnergy will be able to realize premium prices for this project. Looking at our second project announced last week, this is an investment into a group called Restoration Bioproducts. This is an experienced pyrolysis project developer in the US who has experience with similar projects. It is a smaller investment $1.35 million with approximately $600,000 paid on closing and the remaining amount over milestones. It has a project life of 25 years. And exciting about this project is this will be our first investment into the US and our first investment into carbon removals. Similar to Community Carbon, we expect first credit to be delivered in 2023. The project is being registered under a standard called Puro.earth, which is the leading standard for biochar carbon projects around the world. Biochar itself, just for everyone's knowledge, is short for biological coal. It is produced by heating organic feed stocks, limiting the oxygen and results in a very stable form of carbon that prevents the release of greenhouse gases into the atmosphere. The product itself is added to soil to improve nutrient and water retention and increase crop productivity. So it allows for a creation of a carbon credit through the removal of carbon and also has significant values from an agricultural basis. The project itself is located in Virginia. We expect it to be a significant employer to the local community. And for this stream investment, Carbon Streaming will be retaining approximately 100% of the credits generated and will have ongoing revenue sharing payments with Restoration Bioproducts. Looking at both projects from a high level basis, what we see is really exciting about these two projects is that they're providing both regional and project type diversification for Carbon Streaming. Both streams represent discussions and work that has gone on over the past 12 months where we've really tried to take into consideration both the business plans from a financial basis but also from an underlying business growth, so that the companies are able to execute their plans using stream financing. These are both what we would consider very strong tier one groups with experience in carbon markets and experience in the underlying business, strong track records, local management teams and significant work with the communities and governments. We see these attractive projects for corporate buyers of credits and we see these as two models that we'll be able to use for future investments from here as well.

[Justin Cochrane:]

Okay, thanks Mike. And as you can see, we are absolutely thrilled to be partnering with both Restoration Bioproducts and UpEnergy and Community Carbon in these two projects. And again, think those are indicative of what we what we plan to do here with our investment pipeline in the near future. So thanks again, Mike. And Operator, we are now happy to take some questions.

[Operator:]

You're free first question comes from the line of Aaron MacNeil from TD Securities.

[Aaron MacNeil:]

Maybe I'll start with the obvious one, I guess, I can appreciate that you may not want to speculate about any resolutions in Indonesia and what the implications might be for Rimba Raya. So I guess my question is, have you or anyone from InfiniteEARTH had any formal discussions with the Indonesian government and what do you expect to happen for projects like Rimba Raya that have already had a long operating history? And I guess more specifically, do you expect that the government will honor already approved projects and sort of grandfather them in even in a scenario where they may restrict the development of new projects?

[Justin Cochrane:]

And to be to be clear on this question, I mean, we've obviously included our view in a press release at the end of April. From Carbon Streaming’s perspective, we're in regular contact with the InfiniteEARTH team and the Rimba Raya team. They're also in regular contact themselves with the relevant authorities in Indonesia. We, as a group, Carbon Streaming, as well as Rimba Raya, are just respecting the process that Indonesia is undertaking as it reviews its national carbon policy. I think the only -- we're quite happy to be partnered with a group like Rimba Raya that is very much respecting local rules, local law. And we've just decided that in light of them reviewing their national policy, we're going to delay the next verification until that is finalized. We believe this is a temporary pause on verification, we don't expect any other long-term impacts of any kind. I don't want to speculate on what it means for other projects. What we know for Rimba Raya that it's got a new concession license, it's respecting the rules and laws in Indonesia. And we very much believe that this is a -- this is going to be part of a broader movement of countries that review their national carbon policies to pull those in line with their NDC commitments as part of the Paris Agreement. And long-term, we expect this to be very positive for not only Rimba Raya but for other projects around the world, including Indonesia. So we're not -- we feel very good about it. It's a temporary pause we believe and our team at Rimba Raya is doing exactly what it should be doing. And so frankly, we're -- we think it's a testament to the quality of the team and the quality of the project over at Rimba Raya.

[Aaron MacNeil:]

We've seen the expansive -- some of the expansive benchmarks that and NGL decline after Russia's invasion of the Ukraine. I assume that's because of fears over countries and corporations. Prioritizing energy security over energy transition, I know most of the credits that you sell are transacted over the counter and may not line up with those benchmarks at all. So I guess my follow-up question is, I was hoping that you could comment on what you expect in terms of price realizations based on your ongoing dialog with potential credit purchasers for your portfolio. And maybe you could add -- I guess, you've already talked about the new project. So maybe just your ongoing -- your existing portfolio?

[Justin Cochrane:]

You're breaking up a little bit at the at the end there, but I think I got the gist of your question. So from a pricing perspective, yes, we have seen some volatility and carbon prices globally, following the Russian invasion of Ukraine, and we continue to see some of that volatility across different benchmarks. Frankly, the nature based credits and cookstove credits, as an example, have hung in there extraordinarily well, and still remain at premium pricing. And then on top of that, of course, we expect that our projects will continue to sell at a premium to those benchmark prices and in some cases, quite a substantial premium to those benchmark prices. So while the exact pricing, of course, will be dependent on timing of credit issuance and buyer appetite at those points in time and we're not selling credits today, so I don't want to speculate exactly on specific pricing. But we certainly believe the credits that we have in our portfolio will be at a premium to those benchmark prices that you referred to and again, in some cases, quite a significant premium. So we're -- and again, we've seen frankly quite strong resilience in the key types of credits in our portfolio. And are very encouraged by the sort of depth of buyers and interest that we see in credits. I wouldn't be -- I would tell you that we have new buyers of credits reaching out to us several times a week, and buyers that are that are directly coming in to us looking for credit. So we're pretty excited about what that demand profile is, how that demand profile is shaping up and obviously, excited to get some credits and start selling those.

[Aaron MacNeil:]

Maybe I'll sneak in a quick third question. I know you won't get into the details, but I assume the new streams that you've announced over the last couple of weeks would be consistent with the IRR hurdle rate, or however you want to describe your investment hurdle rate.

[Justin Cochrane:]

Absolutely, yes. Yes, we've been fairly public about targeting investments using a 15% internal rate of return and both of those projects would be consistent with that.

[Operator:]

Your next question comes from the line of David Quezada from Raymond James.

[David Quezada:]

My first question here, just on the Community Carbon, UpEnergy investment. I know you mentioned first credits you expect in 2023. I’m just curious if there's any color you can provide on the shape of credits, should we assume that -- I think consistent with a lot of cookstove projects that are fairly flat profile of credits over the contract term and I guess any other color you could provide on how long you expect the ramp up to take to that kind of run rate?

[Justin Cochrane:]

So we expect that as we deliver cookstoves over the next several years that obviously the credit profile will ramp up. It's over about a four year period, four to five year period where credits will ramp up, and then sort of steadily expected to decline following that over the 15 year term. So that would be the best sort of profile to use, David.

[David Quezada:]

And then as you look forward, I mean, I guess each of UpEnergy and Restoration are -- while, you've been working with them for about a year but new investments. I'm curious on the cookstove water purification side and I guess on the biochar side as well, now that you're in those regions and in those carbon credit types, do you see opportunities to scale up in any of those instances?

[Justin Cochrane:]

I mean, certainly, I mean, these partners that we're partnering with are proven project developers. And certainly, we see an opportunity to hopefully transact and scale up both projects into new opportunities. And that would be true of almost every group that we are working with and plan to work with frankly. So the short answer is yes, David.

[David Quezada:]

And then maybe just I'm curious if you can provide us an update on where we are with issuance of credits at MarVivo and BCI, any milestones that are coming up, or I guess any color on how those projects are proceeding?

[Justin Cochrane:]

Yes, still proceeding as planned. And David, no material updates, both continue to work through their respective project development processes. So still targeting 2023 for MarVivo and 2024 for the BCI projects. So no other sort of particular updates on those, but both continue to advance well.

[Operator:]

Your next question comes from the line of Sean Keaney from Eight Capital.

[Sean Keaney:]

I was just wondering about the revenue sharing payments that you'll be making with the project, the projects announced today, if you can comment on that. And then if you can comment on the amount that would be going to the Community Carbon fund?

[Justin Cochrane:]

So on both projects, they're both consistent with the previous guidance we've provided for the year in terms of the revenue share model. So between 75% and 85% of our revenue, and so that's true for both of those projects. In terms of the community carbon, we haven't specified the exact percentage, but it's a fairly material portion of our revenue that we plan on committing to Community Carbon funds, and to help advance those community initiatives that Mike referred to. So pretty excited about that funding. And of course, what it then means from a quality and branding perspective for these credits as we go to monetize those.

[Sean Keaney:]

On the biochar project, I was wondering if you could comment about the verification process with Puro.earth, and how you've seen that defer or how it's similar with what you've observed working with their gold standard?

[Mike Psihogios:]

Happy to jump in here and a great tech question, because it is our first investment under Puro.earth. So as part of our due diligence, we worked with Restoration Bioproducts, but also had several discussions with Puro.earth. It is a very similar process to Verra and what's in place for our other projects. So it's a similar model where you have a project validation registration process and then credits are issued, they can be issued on a regular basis, the project itself will likely issue credits on a quarterly basis.

[Operator:]

We have a follow-up question from the line of Aaron MacNeil from TD Securities.

[Aaron MacNeil:]

A couple quick follow ups on the cookstove water project. What are the milestones and when do you expect to have to make those payments, and will the credit delivery differ between the Verra and gold standard verified project?

[Mike Psihogios:]

In terms of the project milestones as this is a stream that's covering seven projects together, we do have embedded milestones for each of the seven projects within the stream. Those are primarily relating to the achievement of first credit issuance and then looking at the distribution and the rollout of cookstove units. And we've structured this so that we can facilitate Community Carbon scaling up multiple projects in multiple countries and come up with a financing model that works really well to allow them to achieve those business goals.

[Aaron MacNeil:]

And then on the difference between -- since you're essentially using two registries, will you receive credits potentially at different times?

[Mike Psihogios:]

I didn't actually catch that last part…

[Aaron MacNeil:]

Part of the projects going to be verified by gold standard, part of it by Verra. And so just from a modeling perspective, like do you expect…

[Mike Psihogios:]

To answer that point, they're very similar profiles. It just makes more sense from the project developers’ perspective for the project in Tanzania to be registered under Verra, but the profiles themselves are very similar for the project.

[Operator:]

That concludes our Q&A session. I will now turn the call back over to Mr. Justin Cochrane, for closing remarks.

[Justin Cochrane:]

Thanks very much, operator. And again, thanks, everyone for joining the Q3 call. We certainly look forward to the update following our year-end results. Thanks again for joining and have a great day.

[Operator:]

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