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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Carbon Streaming First Quarter 2023 Financial Update Conference Call. [Operator Instructions] Please note, this call is being recorded today, Monday, November 14, 2022 at 11:00 a.m. Eastern Standard Time. I will now turn the call over to Andrea Cheung, Vice President, Investor Relations.
Thank you, Joelle and thank you to everyone for attending Carbon Streaming’s first quarter 2023 conference call. Joining me on the call today are Justin Cochrane, CEO; Conor Kearns, CFO; and Mike Psihogios, Chief Investment Officer. Geoff Smith, President and COO, is also available for the Q&A section of this call.
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 read the disclosure related to these non-IFRS measures in the company’s MD&A. Also, all dollar amounts mentioned in the conference call are in U.S. dollars unless otherwise noted.
I will now turn the call over to Justin to provide an overview of the quarter.
Thank you, Andrea, and welcome, everyone, to the call. I will provide some introductory remarks before turning the call over to my colleagues. Conor Kearns will discuss our financial results; and Michael Psihogios will review what was another active quarter of Carbon Stream and Royalty acquisitions.
We continued our momentum from fiscal 2022, further growing and diversifying our project portfolio. We ended up closing the Community Carbon Stream. That’s our cookstoves and water filtration projects in 5 countries in Africa. We added the FCG Amazon Portfolio Royalty in Brazil. And we also added the Nalgonda Rice Farming Stream in India. And a new royalty on the Bonobo Peace Forest projects in the DRC. So a very, very active quarter.
After quarter end, we also added another biochar stream in the U.S., which we’re quite excited about. Today, we have streams and royalties on 21 projects in 12 countries and remain well capitalized to continue executing on our strategy. Just first off, with respect to our Rimba Raya project in Indonesia, as we do get a lot of questions on this. A couple of weeks ago, the Indonesian Ministry of the Environment and Forestry published regulations in Bahasa language, setting out a framework for domestic and international carbon trading in Indonesia.
We see this as good progress and are awaiting further clarity to understand the full implication for our Rimba Raya stream. Our partner, InfiniteEARTH, continues to cooperate and engage with the Indonesian government through the policy development and implementation process. We remain supportive of Indonesia’s policy development and believe it will be ultimately a positive for the country, for global carbon markets and for climate action as well.
So shifting gears slightly, I also wanted to draw attention to our publication of our inaugural Sustainability Report earlier this month. The report goes through our approach to ESG and our commitment to climate action, and describes how we’re prioritizing partnerships with project developers in projects that also protect biodiversity and help to build sustainable communities around the world. This is a really, really integral part of our investment decision process. That report is on our new website at www.carbonstreaming.com, and I would encourage any listeners to take a quick read through that, please.
I’d also be remiss not to mention COP 27 taking place as we speak in Egypt, 190 countries represented with over 90 heads of states discussing climate change. The private sector is also participating in a big way and watching intently to these – to the progress that’s made at COP 27. A new report last week was published by the UN High-level Expert Group on the net zero emissions commitments of non-state entities, non-state entities generally referred to as the corporates. And this report strongly encourages those non-state actors to purchase high-quality, high-integrity carbon credits to meet their interim targets on their net zero pathway. So again, sort of a high-level encouragement for these corporations to start purchasing carbon credits.
And despite the market conditions and challenges that we currently see, we’ve had 1,500 new companies make net zero commitments in the past 12 months. That’s a 25% increase year-over-year, where today, nearly 7,000 companies worldwide have made this commitment to net zero and we expect that number to continue to grow. That data comes from Trove Intelligence. So with that environment as our backdrop, we think 2023 is going to be a transformational year for the company with several projects expected to begin delivering credits and generating revenue for the company.
We continue to see significant interest in our projects from corporate buyers, which we see as a tremendous sign. We continue differentiating our business through our sales efforts and our sales team who are working directly with corporate buyers to help meet their net zero commitments. We maintain a robust balance sheet to continue executing, diversifying, growing our portfolio. And we’re going to continue accelerating our climate action by reducing and removing greenhouse gases and creating value for all stakeholders of the company. Our efforts over the last 3 plus years will finally start to bear fruit in 2023.
I will now turn the call over to Conor Kearns, our CFO, to provide an overview of the financial results.
Thank you, Justin, and thank you to everyone tuning in to today’s call. In the first quarter, Carbon Streaming generated carbon credit sales of $27,000. These credits were sold from the Rimba Raya inventory we acquired outside of the Rimba Raya stream agreements. And going forward, we will continue to sell down this inventory opportunistically.
In the quarter, we reported a net loss of $2.4 million. After adjusting for a $2.9 million non-cash gain related to the revaluation of the company’s Canadian dollar-denominated warrants, the adjusted net loss was $5.3 million. Our team continued to be active, executing stream and royalty agreements in the quarter. We paid $13.3 million and committed to pay a further $1.8 million for new Carbon Credit Streaming and Royalty agreements, early deposit interests and other investments during the quarter. Subsequent to quarter end, we announced and paid an initial upfront deposit of $500,000 to Standard Biocarbon upon signing of the Enfield Biochar Stream agreements. Michael Psihogios, our Chief Investment Officer, will provide an overview of our projects later in the call.
As at September 30, the company had $72.7 million in cash, no corporate debt and adjusted working capital of $74.6 million, which excludes $13.8 million of warrant liabilities. The company continues to be well positioned to execute on its strategic objectives and deliver on its streaming commitments. In Thursday’s filing of our financial results, we noted that we are changing our year end to December 31 to better align our financial reporting cycle with traditional financial, operational and taxation cycles. As such, we will report audited financial statements for a 6-month transitional fiscal period from July 1 to December 31, 2022.
Now I would like to pass it over to Michael Psihogios, our Chief Investment Officer, to discuss the new streaming and royalty agreements from the first quarter.
Thanks, Conor, and good morning, everyone. In the first quarter, we closed the Community Carbon’s upstream and announced three new transactions. These transactions further expanded our geographic footprint alongside diversifying our expected 2023 project revenue. These transactions were the Future Carbon Group Amazon Portfolio Royalty, the Bonobo Peace Forest Royalty and the Nalgonda Rice Farming Stream.
Looking at the first investment, in September, we announced a royalty agreement with Future Carbon Group. This agreement consists of a 5% royalty, covering a portfolio of four high-impact REDD+ Verra projects in the Brazilian Amazon. The portfolio aims to reduce approximately 68 million tons of CO2 over a 30-year life with revenue starting in 2023. Future Carbon is one of the largest developers of carbon projects in Brazil with an unmatched track record in the Amazon rainforest. Future Carbon Group is a strategic partner, and we look forward to a long-term relationship on further projects over the years.
Now looking at BCI. In September, we also announced that we and Future Carbon will be partnering to advance the development of the Bonobo Peace Forest projects alongside BCI, the Bonobo conservation initiative. We amended our term sheet and entered into an agreement with BCI for a 5% revenue royalty on the Bonobo Peace Forest projects. The royalty agreements with Future Carbon and BCI form the basis for potential future stream agreements.
Lastly, at the end of September, we announced the Nalgonda Rice Farming Stream with Core CarbonX to develop a sustainable rice-farming methane avoidance grouped project in the Nalgonda District in India. The project enrolls rice farmers to reduce GHG emissions by improving rice cultivation practices. The project is expected to generate 2.5 million DCUs over 7 years with Carbon Streaming receiving 100% of DCUs with an economic sharing agreement in place with Core CarbonX and the participating farmers. We expect first delivery under this stream in 2023.
Lastly and subsequent to the end of the quarter, we announced the Enfield Biochar Stream with Standard Biocarbon in Maine. This project adds a second biochar carbon removal project to our portfolio. The project is expected to deliver 90,000 removal certificates over 30 years with ongoing delivery payments to Standard Biocarbon after the certificates are sold. Removal certificates are expected to be independently verified and registered through Puro.earth. Additionally, we received a revenue royalty on the volume of biochar sold, enhancing our projected economic return.
In summary, we are excited to see the transformational progress of Carbon Streaming’s global project portfolio, encompassing both removal and avoidance projects. We continue to focus on sourcing quality projects from experienced development partners to meet long-term corporate buyer demand.
With that, I will turn the call back over to Justin.
Thank you, Mike and Conor. In the first quarter, we continue to be focused on our growth and diversification strategy by adding those streams and royalties that Mike just detailed. With our strong balance sheet, we continue to evaluate our pipeline of opportunities and expect carbon credit deliveries from several projects in our portfolio commencing in 2023. That does conclude our formal remarks.
And I will turn the call over to Joelle, please to open the line for questions.
[Operator Instructions] Your first question comes from David Quezada with Raymond James. Please go ahead.
Hey. Thanks. Good morning everyone. My first question, maybe just regarding your – the new streaming and royalty agreements [ph] you have added during the quarter, obviously, lots of activity happening. And it looks like your opportunity set still is pretty significant. I am just curious, are you – typically the projects that you are moving forward on today, are they just the ones that have become most advanced in your pipeline and they meet your return hurdles, or have you started taking kind of a portfolio approach to the investments you are making? And like are you starting to see that kind of dictate more of your investment decisions today?
Yes. Thanks David and thanks for joining and great question. I mean we are always evaluating the investment pipeline as you can imagine. There is probably over 100 projects or so in that pipeline at any given point in time. So, it’s a mix of portfolio development with a focus obviously on diversification, high-quality project partners, obviously, high-quality credits. We certainly see this market with a big focus on quality. And so I would say that’s the biggest focus for us is finding those quality partners and of course, generating – being able to generate a very attractive cost of capital on the capital we deploy. So, the markets are challenging markets. So, we continue to look at those and make sure that we are investing in just the highest quality projects that we can find. I think that’s the easiest way to describe the process.
Okay. Excellent. That’s helpful. Thank you. Appreciate the color. Maybe – and then maybe one just with respect to the market overall, when you guys are talking with customers, I am just curious with the volume of retirements that we have seen so far this year, voluntary carbon offset retirements, do you think that there are some buyers that still need to come into the market towards the last couple of months of the year to meet their requirements? Do you get the sense that there is some maybe a building sense of urgency among buyers to acquire credit so they can meet their ‘22 targets?
Yes. So, I would say in the market, we tend to see the highest activity levels at the end of this year and generally, the first, call it three months or four months of the following year just as sustainability reports are finalized and previous footprints are offset. So, it’s actually – the most activity is probably in the first three months or four months of the year. I would say what we hear from buyers is, again, that real focus on quality and ensuring that they are buying credits and offsetting their own emissions from only the highest quality projects around the world.
Okay. Excellent. Thanks for that. And maybe just one last for me before I turn it over, just thinking about your reports about delays at the voluntary carbon offset registries. I am just curious as you go to receive some of your first credits in ‘23, how do you see those delays affecting the receipt of those credits, if at all?
Yes. I mean it’s really out of our control and out of our hands. We certainly still do see delays at most of the major registries. It makes planning for the specific date of receipt of those credits a little bit difficult, as you can imagine. But we also see significant efforts underway to speed up the verification and issuance of those credits. So, we are certainly hopeful that those will start to – some of those efforts will start to bear fruit in 2023. But it really is hard to know just whether we are talking about a three-month delay or a six-month delay or longer, we just – we really don’t know in some cases.
Okay. Fair enough. Thank you for that. I will turn it over.
Thanks David.
Your next question comes from the line of Aaron MacNeil with TD Securities. Please go ahead.
Maybe I will just follow-up on David’s question. Just specific as it relates to the Cerrado Biome stream, like where are you at with respect to that in terms of the verification process?
So, we are in the verification process or our project partner, ERA is in the verification process with Verra. So, they are engaged with Verra. And again, while we don’t have exact clarity on the timing of those credits, we are hoping that they are sometime in the near-term.
That would be – just to clarify, that would be your most near-term like stream.
Correct, yes.
Okay. And then I know you mentioned this in your prepared remarks, but you mentioned the published framework in Indonesia. Can you share any specific or additional details of that framework, particularly as it relates to exports? And as it relates to COP27, in your opinion, do you think countries like Indonesia need more clarity on corresponding adjustments before they sort of reengage with the voluntary carbon market and exports specifically?
So, this is an active area of discussion at COP27 for sure. Indonesia specifically on what – on its published regulations, we don’t yet sort of fully have clarification on how it’s going to impact the Rimba Raya project in particular. But a lot of the discussion at COP27 is around whether credits can be traded internationally with or without corresponding adjustments that countries can use to meet their NDC commitments as part of the Paris Agreement. So, there – so we are hopeful that some more clarity comes out on those – in that regard at COP27. I don’t know that Indonesia – in fact, I don’t think that Indonesia is going to wait for perfect clarity before it proceeds with its carbon policy. Again, we saw the announcement or the release a few weeks ago and the policy is a very positive step towards kind of unlocking those credits from Indonesia that have been sort of on hold for the better part of a couple of years now. So, again, don’t have perfect clarity on what it means for Rimba Raya, but our partner, InfiniteEARTH, is working closely with the government to try and determine what this means.
And you mentioned the policy – like is there anything specific you have learned from that disclosure in terms of like how credits might be exported? I know not specific to Rimba Raya, just in general.
Yes. I mean the rules, again, depending on sort of who they are sold to and how they are sold and it’s different for every sub-sector as each minister of each sub-sector in Indonesia needs to sort of opine on their own NDC commitments before we have final numbers, again, part of the reason why we don’t have perfect clarity on Rimba Raya. But what it shows is what we expect it to show or as we understand it, that sort of 75% to 85% of the credits from a carbon project could be sold internationally with some credits sold about 5% – up to 5% for domestic usage and another 10% to 20% in a buffer account that would be sort of withheld by the country to meet its NDC commitments. But again, the exact percentages will highly depend on each sub-sector and each minister has to sort of come in and opine on what it means. But we see it as a pretty good outcome for Rimba Raya, but again, still awaiting further details.
Got it. Okay. Thanks. I will turn it over.
Thanks Aaron.
[Operator Instructions] Your next question comes from the line of Christopher Tatum with Three and Zero Capital [ph]. Please go ahead.
Thank you. Justin, what effect does John Kerry’s proposal for public-private carbon market for developing countries have on your opportunities?
Yes. Thanks very much, Chris. So, John Kerry again was highly complementary of, call it, corporate America and other corporates from developed countries, supporting capital and projects in the developing world to again sort of encourage a reduction in emissions. And specifically for what John Kerry was talking about, sort of clean energy production in those developing nations. So, I think John Kerry, as many others are recognizing, we need private capital to come into the developing world to help these projects get built, get capitalized. And the carbon credit market is just a spectacular mechanism for getting funding flowing to these developing nations. And so that was what John Kerry was talking about and broadly talking about the need to, again, encourage renewable energy production in developing nations around the world. And again, so I think it’s quite constructive for the types of projects that we are funding around the world.
So, it’s not competitive. This is – this helps you, right, in the end?
Absolutely.
Okay. Great. And then can you talk about the risks that you see in developing countries, doing business in developing countries?
Yes. It’s a great question, Christopher. I mean there is – as I have stated before, we have projects now in 12 countries around the world. And countries around the world are certainly recognizing that carbon is a key commodity and a key way of encouraging financial flows and investments in their local economies. And so broadly speaking, and again, I think what’s going on in COP27 right now is a perfect example. You have got 190 countries around the world altogether talking about climate change. And broadly looking to meet their Paris Agreement commitments and have flows of capital, again, coming from the developed world into the developing world to fund these projects. So, it’s – there is always risk in – there is risk in carbon projects in the U.S., in Canada, North America, South America, Africa, there is sort of – there is always regulatory risk wherever we go. But broadly speaking, these governments have been very, very supportive of encouraging the development of projects that reduce carbon emissions and help fight climate change. And again, they have all sort of committed to this as part of the Paris Agreement and what we are seeing at COP27. So, a bit of a long-winded way. We diversify our exposure to any specific country just by, again, investing around the world. But again, the more that countries like Indonesia get involved in the carbon space, the more validation it gives us that this market is a market that’s here to stay and has a lot of government focus, which we actually think is very positive for our business long-term.
That’s great. And lastly, could you update us on where the stock is trading relative to cash and NAV. When I guessed, just finally, what do you think the principal reason is that the stock is so undervalued here?
Yes. Thanks Christopher. It’s a great question. We are trading just slightly above our cash position right now. The stock is trading just above CAD255. And I think we have about CAD210 in cash. From a net asset value perspective, we see that’s at about third of our net asset value. So, why is that, I think for us, obviously, we have seen a lot of market volatility. And we haven’t yet seen significant deliveries of credits from the 21 projects that we have in the portfolio. So, that’s why we are saying in 2023, we expect it to be a transformational year for us because we will finally start to get credits delivered from our big projects. We will have revenue. We will have cash flow. And we will be able to prove that the model works. And when you see these royalty and streaming companies, they do tend to go through a period of sort of show me that it works, prove to me that it works. And I believe 2023 is going to be a great year for that. So, certainly, we are very focused at the management level to telling the story, getting investors to understand where the value is and that’s going to be a big focus for us throughout the balance of this year and into next year.
Thank you. Very bullish on the companies. Thank you.
Thanks Christopher.
There are no further questions at this time. Please proceed.
Okay. Thank you very much Joelle and thanks everyone for joining our first quarter conference call. We look forward to chatting again in a few months.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.