Carbon Streaming Corporation
Q2 2023 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, welcome to the Carbon Streaming financial update conference call for the quarter ended June 30, 2023. [Operator Instructions] Please note that this call is being recorded today, August 15, 2023, at 11 a.m. Eastern Daylight Time.
  • I will now turn the call over to Justin Cochrane, Founder, President and CEO of Carbon Streaming. Please go ahead, sir.:
  • Justin Cochrane:
    Thank you very much, operator, and welcome, everyone, and thanks for attending our 3- and 6-month ended June 30, 2023, conference call. I'm Justin Cochrane, President and CEO of Carbon Streaming; and joining me on the call today is Conor Kearns, our CFO.
  • Today's call may contain forward-looking statements, which involve assumptions that have inherent risks and uncertainties. Please refer to the advisories and cautionary notes provided in the news release and the MD&A as well as the risk factors discussed in our annual information form. For more information, please review the company's regulatory filings available on SEDAR+ and on our website at www.carbonstreaming.com.:
  • Also, please note that the company uses non-IFRS measures in its reporting. Participants are encouraged to review the disclosure related to these non-IFRS measures in the company's MD&A. All dollar amounts mentioned in this conference call are in U.S. dollars, unless otherwise noted.:
  • So just to get started, Q2 was a quarter where we continued to position the company for future success. We made significant progress with our sales and marketing efforts on corporate partnerships to continue to support our projects. We did add the Mast Reforestation $15 million pipeline funding agreement this quarter, which is restoring post-wildfire land in the U.S. And the first project in there is the Sheep Creek Project in Montana, which I'll touch on a little bit later.:
  • We also implemented a number of measures to reduce ongoing operating costs and enhance our cash management practices, which resulted in almost an 80% reduction in our adjusted net loss compared to the same period last year. We sold or retired over 100,000 credits this quarter and expect that to continue to grow in the coming quarters.:
  • And subsequent to the end of the quarter, we increased our investments in the Waverly Biochar Project in Virginia to USD 2.95 million. We've added a royalty on the Biochar that's being sold there, and we're now expecting Waverly to produce over 10,000 carbon removal credits per annum. So some exciting developments this quarter.:
  • And to review the financial results, I'll pass the call over to Conor Kearns, our CFO.:
  • Conor Kearns:
    Thank you, Justin, and thank you to everyone participating in today's call. In the second quarter, Carbon Streaming generated revenue of $44,000 from the sale of 6,646 carbon credits for an average realized price of $6.62 per credit. These credits were sold from the company's Rimba Raya inventory, which we purchased outside of the Rimba Raya stream agreement.
  • Additionally, on the sales side, the company sold a further 97,184 carbon credits during the quarter from the credits the company received from its first delivery of credits from the Cerrado Biome stream for net settlement proceeds after ongoing delivery payments of $38,000.:
  • For the second quarter, we reported a net loss of $9.2 million. Included in this net loss of $9.2 million for the quarter was an $11.5 million loss on the revaluation of the company's carbon credit streaming and royalty agreements. Carbon Streaming is required to do a fair value assessment on its streaming and royalty agreements at each reporting period. And given Rimba Raya's continued delay in credit issuance and the unknown time line around when carbon credits may be issued from the project, the company increased its discount rate and pushed out cash flow timing in its model, resulting in a fair value adjustment.:
  • After adjusting for the fair value revaluation of carbon credit streaming and royalty agreements, the revaluation of warrant liabilities and corporate restructuring expenses, the company's adjusted net loss was $800,000. This was a significant improvement to our Q2 2022 adjusted net loss of $3.6 million and I think shows the success of the cash management practices and ongoing efforts to reduce corporate G&A.:
  • In the second quarter, we paid $3.4 million in upfront deposits and milestone payments for carbon credit streaming and royalty agreements. These relate primarily to milestones being met for Community Carbon and the Sheep Creek Reforestation stream.:
  • As of June 30, the company had $59.4 million in cash and no corporate debt. The company's balance sheet remains strong, and we continue to be well positioned to execute on our strategy and meet our streaming commitments.:
  • Now if I may, I'll pass it back to Justin Cochrane to discuss a few portfolio updates from the quarter.:
  • Justin Cochrane:
    Yes. Thanks, Conor. Just a couple of reminders for listeners. The company now has 22 projects in 12 countries. As Conor mentioned, these projects are fair valued at each reporting date. And if you look at the balance sheet value today, there's over CAD 2.40 per share currently in the value of those projects.
  • On top of that, considering the cash balance, we have over -- we have CAD 1.70 in cash per share at the company for total assets of over CAD 4.10 per share, again, in Canadian dollars. So we see ourselves trading at a significant discount to that fair value assessment and cash balance on our balance sheet.:
  • In terms of just a couple of project updates, Community Carbon, now -- we've now issued credits from 2 projects inside the Community Carbon investments. 6 of the 7 Community Carbon projects are now distributing cookstoves and water filtration devices, and that's certainly been meeting our expectations.:
  • Just in terms of pricing on cookstove projects in general, we do see pricing in the $6 to $8 range for cookstoves and generally -- and we are selling inside that range for the most part. On the Cerrado Biome project, we've had credit issued there earlier this year, and we're starting to see some success selling those credits. Very excited about that project.:
  • Cerrado Biome is a REDD+ project in Brazil, and REDD+ credits today are selling in the $5 to $10 range. And again, certainly, we are selling credits inside of that range. And again, just on Mast, in our Sheep Creek Project, this was a $3.8 million investment into the first project in Mast. That's a project expected to generate 225,000 credits with first issuance in 2025. We do expect a number of additional projects to be announced with Mast in the coming months. And that's a project, given it's our first reforestation project in the U.S., it's a project that we're very, very excited about.:
  • And just at the company level before I turn it over for questions, our focus here at Carbon Streaming is really on our sales and marketing efforts and supporting our partnerships, again, 22 projects in 12 countries around the world. And you'll see from our corporate activities, we are focused on getting to profitability and doing that as quickly as we can.:
  • So with that, happy to pass the call back to you, operator, please, for questions.:
  • Operator:
    [Operator Instructions] Your first question is from Aaron MacNeil from TD Cowen.
  • Aaron MacNeil:
    Justin, how do you reconcile the $38,000 proceeds from Cerrado with the prevailing pricing? I believe you said $5 to $10 in your prepared remarks. If you kind of assume a delivery payment in the range that you've described previously, that would imply pricing that was quite a bit lower than that.
  • Justin Cochrane:
    Yes. Thanks, Aaron, and a good question. I would just, I guess, remind all the listeners that the revenue share that we have with each project does vary. On average, we say the 15% to 25% range, but it does vary quite significantly by project. It's not as simple as just applying a straight sort of revenue assumption across every project. That's not going to get you to the right price.
  • Aaron MacNeil:
    Okay. What's your view in general on the core carbon principles? And then more specifically, how do you think about the Sheep Creek Reforestation Project in light of ex-ante credits not being eligible under the core carbon principles?
  • Justin Cochrane:
    Yes. Listen, I think the core carbon principles are an excellent effort underway to bring additional transparency and confidence into the market. I think there's been some tremendous work there in the last couple of years. And so very, very supportive of those efforts because this industry needs -- it needs that to increase confidence and get -- and ensure that buyers and sellers are happy with the pricing that they're paying and receiving, right?
  • Of course, in terms of the ex-ante credits at Sheep Creek, obviously, the core carbon principles aren't going to be relevant for every single project. That's a project in the U.S. where we see a significant level of interest from corporate buyers just given the fact that you're -- it's obviously incredibly topical now with the wildfires that we see in -- well, around the world. And in Canada now, I think we've got 30 million acres that have now burned. So very topical for corporations in restoring post-wildfire lands in the U.S. And we haven't seen any challenges -- or experienced any challenges looking at corporate interest in those credits.:
  • Aaron MacNeil:
    Okay. Makes sense. You mentioned in the prepared remarks that you increased the discount rate and pushed out the cash flows at Rimba Raya. Just hoping you can give us a bit more detail on what those prevailing assumptions are for the stream. And are the price realizations in the quarter indicative of your assumptions going forward?
  • Justin Cochrane:
    So for every project, we, of course, have a corporate model, do a very detailed risk analysis in conjunction with our auditors to look at -- to apply discount rates, cash flow timing assumptions, pricing number of credits to each of our streams. And so for Rimba Raya, I think we increased the discount rate just by a couple of percent as a result of the continued sort of delays that we see there.
  • There's nothing fancier than that, than just changing a few risk assessment numbers, which impacted the discount rate. Obviously, timing of cash flows, we just continue to -- we push that -- push those off until next year. So that results in the fair value adjustment. We haven't made any pricing changes as part of that assessment. We still see high-quality REDD+ projects like Rimba Raya being highly valued by corporate buyers. And we still see a lot of interest in those credits once Indonesia finalizes its carbon policy.:
  • Operator:
    Your next question is from Theo Genzebu from Raymond James.
  • Theophilos Genzebu:
    I'm calling on behalf of David Quezada. Just to start, I guess, I'm curious on -- I guess on the search for a CEO. Is it ongoing? Or is it something you're still pursuing? Or is it something -- or are you going to remain in that role for now?
  • Justin Cochrane:
    Yes. So no, we're not searching for a new CEO, Theo, and I'm going to stay in the role.
  • Theophilos Genzebu:
    All right. Great. And then moving to a broader kind of question. As we -- like we're passing the halfway mark of the year now, do you think there's still like an eagerness for buyers to come towards the credit market to fulfill like their credit goals? Do you get a building sense of urgency to acquire credit as the year progress?
  • Justin Cochrane:
    Yes. Great question. So importantly, we still do expect this market to grow in 2023. I think there's been a general assumption that the whole market has been slow and is down. Although we see some pressure on pricing, we certainly expect the number of credits to be transacted in 2023 to continue to set another record. So we still see a lot of interest.
  • You are right that as we approach the end of the year and the COP meetings in Dubai this year, we do tend to see some more activity. So -- and I can generally say we're starting to see a little bit of a pickup in market activity just in the past couple of months and hope that, that continues over the balance of the year, Theo.:
  • Theophilos Genzebu:
    Right. Great. And then also, you touched on just, I guess, the unfortunate reality of wildfires, especially like in Hawaii going on. So I'm just curious when it comes to like the reforestation projects, is it usually landowners that come and approach you to, I guess, take on these projects or create a project from these lines? Or is it something that you guys go out and pursue? And would there be -- I guess unfortunately, is there opportunity do you see in these different jurisdictions like Hawaii currently?
  • Justin Cochrane:
    Yes. Great question. I mean the -- so in terms of finding the projects, it's both. So we have people that come to us. Mast Reforestation is our partner there. They would have a number of landowners that would approach them. And similarly, Mast would be out approaching -- they use quite a sophisticated AI software to look at reforestation opportunities in the U.S., and so they would be out actively targeting certain landowners as well. So a little bit of both.
  • It's all with private landowners today but also looking at an opportunity to expand into the public space as well. So the unfortunate reality is there's new -- there's a lot of new opportunities created almost daily around the world, which is an unfortunate reality, but also like highlights the importance of carbon markets being able to fund and create an economic incentive to restore these lands. And that's really why we're so excited about the Mast -- that Mast investment and reforestation opportunities more generally, of course, as well.:
  • Theophilos Genzebu:
    Great. And I guess just one last one for me, if I may. When it came to the restructuring charges that you incurred during the quarter, I just want to know if you could give any color on exactly what that entailed and if there's any belief through or any cost you would expect to, yes, I guess make through to the third quarter?
  • Justin Cochrane:
    So it primarily was a result of just personnel reductions, Theo. So nothing really more specific than that other than just a few restructuring charges and personnel reductions. We certainly are expecting a reduction in ongoing G&A as a result of those reductions. I don't have sort of a specific quantity for that, but we are expecting a reduction.
  • Operator:
    Your next question is from Sameer Joshi from H.C. Wainwright.
  • Sameer Joshi:
    So I see that you have discounted Rimba Raya a little bit more. In your internal models, have you also adjusted for expected value from Cerrado Biome and the Cookstoves Project? I think the credit price expectations was around $12 to $14 as against $5 to $10. And then 8 plus -- $8 to $10 for Cookstoves against $6 to $8, which is what you are expecting now. Does that change the way you look at future projects and investment decisions?
  • Justin Cochrane:
    Yes. So in terms of future investments, we are always looking at current market prices but also recognizing that these investments tend to be decade-long investments. So we do take a long-term view, but with a strong eye to current pricing, if you would -- as you would expect.
  • I mean for Cerrado Biome, it's a 30-year -- it's expected to issue credits over 30 years; Community Carbon, on our Cookstove Project, expected to issue credits over 15 years -- 15-plus years. So it's a bit of both, Sameer. We're looking at the current market but also recognizing that these are long-term investments and taking a view over the long term as well.:
  • Sameer Joshi:
    Understood. And just a quick one on Sheep Creek. Is that a high value -- a high credit value project related to these? I think the numbers were discussed at $20-plus per credit there. Is that the expectation now? Are those the current market conditions?
  • Justin Cochrane:
    Yes, that is still the expectation, Sameer. They are very highly valuable credits given they are a carbon removal credit. So just compared to an avoidance credit, of course, you would put a big premium on a carbon removal credit. And given its location in North America, we still expect pricing in that range.
  • Sameer Joshi:
    Understood. On a cash basis, what is your sort of operating cash burn expected to be over the next few quarters given the reductions that like -- that -- than last quarter?
  • Justin Cochrane:
    Yes. So we were operating on a cash burn of about $1 million a month. That has certainly come down. We do need that -- you have a couple of months here to sort of see where everything settles. But we expect a fairly material reduction to where we were previously at about $1 million a month.
  • Sameer Joshi:
    Okay. And then just stepping back, you have roughly USD 59-plus million in the bank right now. Last quarter, you had USD 65 million, there was some burn and then there was some investment in Rimba Raya and other places. How do you see capital deployment in terms of evaluating projects and deploying it faster? Or do you have like a set amount that you'd want to invest over the quarter, I'd say, like $5 million per quarter or something like that? How do you look at deployment strategy for these dollars?
  • Justin Cochrane:
    Yes. Yes. Great question, Sameer. I mean our focus right now is really on the sales and marketing strategy and starting to monetize our existing investments and support our existing partners. We do have -- you'll recall that when we commit to most of our projects and fund projects, we are investing our capital through milestone payments. So what you saw for cash used in investing this quarter was primarily related to Sheep Creek and some milestone payments.
  • So we'll continue to have milestone payments in support of our existing partners. But really, our focus is not on adding big new projects into the portfolio right now. The focus is on sales and marketing, achieving profitability and supporting our existing partners.:
  • Sameer Joshi:
    Understood. Thanks for clarifying that because you do have commitments of your milestone payments over the next few years. And so you're focusing on that rather than finding newer projects to invest in.
  • Justin Cochrane:
    Yes, yes.
  • Operator:
    [Operator Instructions] Your next question is from Júlio Alquéres from Carbon4412.
  • Júlio Alquéres:
    This is Júlio from Carbon4412, São Paulo, Brazil. Good to be joining here today. And I have only one question about G&A. You mentioned how much Carbon Streaming spend with a reduction. But could you provide a guidance on how much that would represent on a yearly basis?
  • Justin Cochrane:
    So unfortunately not, Júlio. Like there's quite a -- between personnel reductions, ongoing efforts to look at sort of other G&A inside the company and just sort of continued personnel changes, it's kind of hard to quantify over a yearly basis.
  • I think what we can say is balance sheet preservation, protecting the balance sheet, focusing on sales, achieving profitability, those really are the focus -- that really is the focus for us. And we expect in the coming quarters that's -- that will continue to bear fruit.:
  • Operator:
    There are no further questions at this time. Please continue, sir.
  • Justin Cochrane:
    Great. Well, thank you, everyone, for joining our Q2 conference call. As always, please feel free to hop on the website. There's some fantastic resources there on our projects. Please feel free to reach out, of course, through the website or to anyone on the management team.
  • Thanks for your time today, and we look forward to talking to you next quarter.:
  • Operator:
    Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.

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