Carbon Credits Play with First Mover Advantage OFSTF
Thesis & Carbon Credits Outlook
Analysis by midagedinvestor86
$1.40
Price Target: $5 & above.
Carbon credits are a relatively new commodity that few people have even heard of yet. The market is growing at a rapid pace and is estimated by at least one leading natural resource investor (more on him later) to be larger than the oil market by the year 2050, maybe even as early as 2040. That is not a typo, the growth in carbon credits is expected to make carbon credits the largest commodity market in the world in 30 years time. This is from a base of only about 1.5 billion this year total and only $320 million this year in the voluntary carbon market specifically.
(cnbc.com/2021/07/08/carbon-credits-institute-of-international-finance-sees-huge-potential.html)
carbonstreaming.com/_resources/presentations/corporate-presentation.pdf?v=0.4
Why will this market grow so much in the next few decades? Because going green is good business! Regardless of whether you believe in man made global warming, this is one of the greatest money making opportunities of a generation and it would be foolish to not recognize and capitalize on it.
The ESG (Environmental, Sustainability, Governance) trend is unstoppable and requires that businesses around the world change their practices to make the world a better place. One of the biggest ways of doing this is to lower their carbon emissions. While many countries around the world are creating cap and trade schemes, there is also a rapidly growing “voluntary” carbon market. Some companies such as large oil producers are in a business that will always generate massive amounts of CO2 emissions however they can “offset” this by producing or alternatively purchasing carbon credits. Why would they do that? Because they want to lower their cost of capital and make their shares attractive to the rapidly growing pools of capital that are mandated to only invest in ESG friendly companies. By lowering their carbon emissions by purchasing carbon credits or building projects that generate carbon credits the company is then able to issue “green bonds”, which have a lower cost to the company than regular bond issuances: katusaresearch.com/carbonomics/
The green bond market is massive and growing all the time. These are bonds of companies that meet certain ESG specifications. Global ESG debt issuance just surpassed 3 trillion dollars in total this month. (Source: katusaresearch.com/carbonomics/) And that will not stop growing. It took 12 years for the first trillion in ESG bonds to be issued, the second trillion took one year, the third took only six months!
The cost of capital is critical for large scale capital intensive businesses like hydrocarbon production firms such as Exxon or Chevron or large industrial metal producers like Rio Tinto or Freeport. By lowering their cost of capital these businesses create huge cost savings for their operations and by going green these companies open their shares up to be bought by far more institutional investors who, because of many factors, are often now required to only buy shares in businesses that have a good ESG scorecard. While it costs money in legal fees, compliance officers etc. to make a company ESG friendly, the savings a company experiences from a lowered cost of capital more than makes up for it.
Oil giant Shell unjust lost a court ruling in the Netherlands that will now require them to cut their greenhouse gas emissions by 45% by 2030: reuters.com/business/legal/big-oil-may-get-more-climate-lawsuits-after-shell-ruling-lawyers-activists-2021-05-28/
Risks
While the stock has a sizable market cap already the shares are very illiquid and if a market crash were to occur before the stock becomes more well known it may be tough to get out of a sizable position quickly without trashing the stock price even more.
Competition-Carbon Streaming has first mover advantage in the space but I expect numerous “me too” companies to pop up in the next 6-12 months with the same business model and this will create competition for the carbon streams that may drive down the Internal Rates of Returns on streams as companies try to outbid each other for the various deals to be had.
Trump gets back in in 2024 however I think this would merely create an initial shock lower in the stock and it would soon recover given that their assets will likely be located all over the world.
To put this in perspective, this will require Shell to buy and/or create 100 million carbon credits per year for the next decade. Is Shell just a one off? No! 24 hours after the Shell court ruling, the board of directors of Exxon was disrupted and two board seats were won in an acrimonious proxy fight by an unknown climate fund called Engine No.1.
Then the shareholders of Chevron voted, and changes will happen there too.
It is inevitable that other large oil companies and large resource miners get with the program.
Carbon credit prices in the voluntary market are likely to rise considerably over the next few years. As legendary Canadian resource investor Marin Katusa puts it:
“All of this is building up a pressure chamber of demand in the Voluntary Carbon Market that has not yet reached a tipping point.
When it does, there’s a lot of upside to be had.
Because It’s the perfect setup for a long squeeze in the Voluntary Carbon Market:
-Rising emissions from a growing population.
-Tightening government mandates on carbon emissions.
-Increasing consumer demand for environmental responsible.
-More transparency in emissions reporting.
-Corporate buy-in at every level, even from non-emitting companies.
-All together, this is going to result in a desperate scramble for high-quality carbon offsets, of which there are few.
If you thought the rise in the price of lumber was crazy in early 2021…
Just wait until you see the VCM market in five years.”
(katusaresearch.com/the-adoption-rate-of-this-obscure-commodity-will-be-the-fastest-of-all-commodities/)
If you want to read more a really good primer on Carbon Credits read this: forbes.com/sites/erikkobayashisolomon/2020/03/13/want-to-understand-carbon-credits-read-this/?sh=4032228671aa
Company Overview
Carbon Streaming Corporation (“CSC”) just went public in Canada under the ticker symbol NETZ (for “Net Zero”) and trades in the US on the over the counter exchange under the ticker symbol OFSTF.
The business model CSC is going to employ is in my opinion brilliant. They are going to finance carbon credit generation projects all over the world in exchange for streams of carbon credits. Let me explain.
Back in the 1980’s and 1990’s companies like Franco Nevada, Wheaton Precious Metals, and Royal Gold pioneered a new business model within the gold industry. Instead of spending money exploring for gold deposits and putting them into production by building mines, they provided investment capital to mining companies in exchange for royalties on the mine's gold production. For example, the royalty company would invest say 150 million dollars into a miner and in exchange they would receive 2% of all the revenue generated by the mine over the entire life of the mine. By doing this the royalty company got exposure to the price of the underlying commodity but took drastically less risk by avoiding having to build and operate the mine
themselves. Later this business model added the concept of “streams”. A “stream” or “streaming deal” is one where again the royalty company like Franco Nevada puts up serious money to help another firm build their mine, and in exchange they get the option, for example, of purchasing say 20% of all the gold produced by the mine for an artificially low price of $400 per ounce. This deal would be called a “gold stream”.
This business model has worked remarkably well in the precious metals space with Franco Nevada returning much more over the long term than gold itself, the Nasdaq, and GDX, the markets leading gold stock ETF: franco-nevada.com/about-us/Overview/default.aspx
These royalty stocks trade at drastically higher multiples than golder miners themselves and currently the three biggest precious metal royalty companies, Franco Nevada, Wheaton, and Royal Gold trade at price to sales ratios of 28, 18, and 14 respectively: Finviz.com
Enter Carbon Streaming Corporation. This company is going to employ the Franco Nevada royalty model to Carbon Credits. The company just raised over $100 million USD in a financing bringing the total cash in their treasury to $141 million USD with no debt. With about 200 million shares outstanding undiluted this amounts to about $0.70 per share in cash. The stock currently trades at about $1.40 per share meaning that when you “net out” the cash, the market is giving Carbon Steaming an Enterprise Value of $140 million. In my opinion this is cheap given the size of the opportunity, the quality of management, and the first mover advantage the company will enjoy for the next 6-12 months.
The CEO of Carbon Streaming is Mr. Justin Cochrane, former investment banker and executive vice president of Sandstorm Gold (NYSE: SAND) , a very successful gold royalty company that has grown from a tiny micro cap to a large player in the space that may one day be considered amongst the giants like Franco Nevada. He has personally been involved with hundreds of millions of dollars of royalty transactions in the precious metals space. He put up millions of dollars of his own money in this latest financing round which is critically important when considering investing in smaller companies in my opinion. The management team as a whole bought 10 million worth of the latest financing.
The shareholder roster for the company is also very impressive and includes legendary Canadian resource entrepreneurs/investors Marin Katusa and Ross Beatty. Mr. Katusa recently took down almost 10% of the over $100 million dollar financing and is considered by many to be the “Young Warren Buffett” of resource investing up here in Canada. He tends to be very reserved and conservative in his valuation models and very selective about his stock picks and entry prices. He is the company’s largest shareholder. In his words: “The amount of capital that has and will continue to be deployed into the Carbonomics Sector is mind boggling—it’s in the hundreds of billions and will reach the trillions….Carbon Streaming Corp is the first company to get involved in the financing and production of carbon credits at a large scale. The company is priced attractively for speculators, given the
early-stage venture risk….I do believe that by 2030, the carbon market can be larger than copper and gold markets, and by 2040 could be $2 trillion larger than the oil market. Let that sink in for a moment. The opportunity here is so compelling and we have a chance to get a core position in one of the leaders in this industry before it gets listed on a Big League exchange.”
The company currently owns two Carbon Credit Streams, the Marvivo Blue Carbon Project and the Bonobo Peace Forest Project. Management has stated both of these projects have Internal Rates of Return (IRR) greater than 15% which is unheard of at this point in the precious metals sector given all of the new companies and competitors have entered the space over the last 10 years. I will not go into the details here but Blue Carbon Credits are superior to regular Carbon credits and will trade at a substantial premium in terms of price. Basically blue carbon credits are created by the growth and conservation of carbon-absorbing plants, such as mangrove forests and their associated marine habitat. A blue carbon project will have its carbon credits trade at a premium because of the enormous second-order benefits on such things as, for example, corals, algae, and marine biodiversity that have been so deleteriously affected by over-fishing and farming.
I expect management to start to deploy their war chest of cash immediately to build their portfolio of high quality carbon credit streams to position itself as the Franco Nevada of the Carbon Credit space. These deals should be positive catalysts for the stock moving forward. Management has stated they are aiming to exit 2023 at a revenue run rate of $200 million USD per year. And that is only using CURRENT PRICING for carbon credits, which actually are expected to move much higher in price over the next few years. Putting a 10-20x pierce to sales multiple on that would peg CSC with a market cap in the billions in a little over 2 years. But with all the “hot money” capital that will seek to enter this space over the next two years I would not be surprised if the market cap gets much higher than that. The reason for this is simple. Other than the exchange traded fund KRBN there are still very few ways for investors to get “pure play” exposure to carbon credits. CSC is going to be the first publicly listed company that provides investors with a way to invest in an equity 100% focused on carbon credits. Given the massive amount of capital looking to get in on this emerging hot investment trend and the tiny amount of options available to those investors, there will likely be massive buying pressure on the stock. Think of a fire hose worth of water trying to get pushed through the eye of a needle!
Conclusion
The carbon credit market is starting to take off and is poised for massive growth over the next 5, 10 and 20 years. CSC has perfectly positioned itself to take advantage of this trend by employing the proven and golden business model (pun intended) of royalty and streaming financing to this fast emerging intangible commodity space. We have a chance to get in on the ground floor of a company that could easily be worth many billions of dollars at a tiny market cap before it lists on a major exchange. The company has all the cash and management expertise that it needs to execute its business model and create enormous wealth for early shareholders. Good luck and good investing to all!
Analysis by midagedinvestor86
$1.40
Price Target: $5 & above.
Carbon credits are a relatively new commodity that few people have even heard of yet. The market is growing at a rapid pace and is estimated by at least one leading natural resource investor (more on him later) to be larger than the oil market by the year 2050, maybe even as early as 2040. That is not a typo, the growth in carbon credits is expected to make carbon credits the largest commodity market in the world in 30 years time. This is from a base of only about 1.5 billion this year total and only $320 million this year in the voluntary carbon market specifically.
(cnbc.com/2021/07/08/carbon-credits-institute-of-international-finance-sees-huge-potential.html)
carbonstreaming.com/_resources/presentations/corporate-presentation.pdf?v=0.4
Why will this market grow so much in the next few decades? Because going green is good business! Regardless of whether you believe in man made global warming, this is one of the greatest money making opportunities of a generation and it would be foolish to not recognize and capitalize on it.
The ESG (Environmental, Sustainability, Governance) trend is unstoppable and requires that businesses around the world change their practices to make the world a better place. One of the biggest ways of doing this is to lower their carbon emissions. While many countries around the world are creating cap and trade schemes, there is also a rapidly growing “voluntary” carbon market. Some companies such as large oil producers are in a business that will always generate massive amounts of CO2 emissions however they can “offset” this by producing or alternatively purchasing carbon credits. Why would they do that? Because they want to lower their cost of capital and make their shares attractive to the rapidly growing pools of capital that are mandated to only invest in ESG friendly companies. By lowering their carbon emissions by purchasing carbon credits or building projects that generate carbon credits the company is then able to issue “green bonds”, which have a lower cost to the company than regular bond issuances: katusaresearch.com/carbonomics/
The green bond market is massive and growing all the time. These are bonds of companies that meet certain ESG specifications. Global ESG debt issuance just surpassed 3 trillion dollars in total this month. (Source: katusaresearch.com/carbonomics/) And that will not stop growing. It took 12 years for the first trillion in ESG bonds to be issued, the second trillion took one year, the third took only six months!
The cost of capital is critical for large scale capital intensive businesses like hydrocarbon production firms such as Exxon or Chevron or large industrial metal producers like Rio Tinto or Freeport. By lowering their cost of capital these businesses create huge cost savings for their operations and by going green these companies open their shares up to be bought by far more institutional investors who, because of many factors, are often now required to only buy shares in businesses that have a good ESG scorecard. While it costs money in legal fees, compliance officers etc. to make a company ESG friendly, the savings a company experiences from a lowered cost of capital more than makes up for it.
Oil giant Shell unjust lost a court ruling in the Netherlands that will now require them to cut their greenhouse gas emissions by 45% by 2030: reuters.com/business/legal/big-oil-may-get-more-climate-lawsuits-after-shell-ruling-lawyers-activists-2021-05-28/
Risks
While the stock has a sizable market cap already the shares are very illiquid and if a market crash were to occur before the stock becomes more well known it may be tough to get out of a sizable position quickly without trashing the stock price even more.
Competition-Carbon Streaming has first mover advantage in the space but I expect numerous “me too” companies to pop up in the next 6-12 months with the same business model and this will create competition for the carbon streams that may drive down the Internal Rates of Returns on streams as companies try to outbid each other for the various deals to be had.
Trump gets back in in 2024 however I think this would merely create an initial shock lower in the stock and it would soon recover given that their assets will likely be located all over the world.
To put this in perspective, this will require Shell to buy and/or create 100 million carbon credits per year for the next decade. Is Shell just a one off? No! 24 hours after the Shell court ruling, the board of directors of Exxon was disrupted and two board seats were won in an acrimonious proxy fight by an unknown climate fund called Engine No.1.
Then the shareholders of Chevron voted, and changes will happen there too.
It is inevitable that other large oil companies and large resource miners get with the program.
Carbon credit prices in the voluntary market are likely to rise considerably over the next few years. As legendary Canadian resource investor Marin Katusa puts it:
“All of this is building up a pressure chamber of demand in the Voluntary Carbon Market that has not yet reached a tipping point.
When it does, there’s a lot of upside to be had.
Because It’s the perfect setup for a long squeeze in the Voluntary Carbon Market:
-Rising emissions from a growing population.
-Tightening government mandates on carbon emissions.
-Increasing consumer demand for environmental responsible.
-More transparency in emissions reporting.
-Corporate buy-in at every level, even from non-emitting companies.
-All together, this is going to result in a desperate scramble for high-quality carbon offsets, of which there are few.
If you thought the rise in the price of lumber was crazy in early 2021…
Just wait until you see the VCM market in five years.”
(katusaresearch.com/the-adoption-rate-of-this-obscure-commodity-will-be-the-fastest-of-all-commodities/)
If you want to read more a really good primer on Carbon Credits read this: forbes.com/sites/erikkobayashisolomon/2020/03/13/want-to-understand-carbon-credits-read-this/?sh=4032228671aa
Company Overview
Carbon Streaming Corporation (“CSC”) just went public in Canada under the ticker symbol NETZ (for “Net Zero”) and trades in the US on the over the counter exchange under the ticker symbol OFSTF.
The business model CSC is going to employ is in my opinion brilliant. They are going to finance carbon credit generation projects all over the world in exchange for streams of carbon credits. Let me explain.
Back in the 1980’s and 1990’s companies like Franco Nevada, Wheaton Precious Metals, and Royal Gold pioneered a new business model within the gold industry. Instead of spending money exploring for gold deposits and putting them into production by building mines, they provided investment capital to mining companies in exchange for royalties on the mine's gold production. For example, the royalty company would invest say 150 million dollars into a miner and in exchange they would receive 2% of all the revenue generated by the mine over the entire life of the mine. By doing this the royalty company got exposure to the price of the underlying commodity but took drastically less risk by avoiding having to build and operate the mine
themselves. Later this business model added the concept of “streams”. A “stream” or “streaming deal” is one where again the royalty company like Franco Nevada puts up serious money to help another firm build their mine, and in exchange they get the option, for example, of purchasing say 20% of all the gold produced by the mine for an artificially low price of $400 per ounce. This deal would be called a “gold stream”.
This business model has worked remarkably well in the precious metals space with Franco Nevada returning much more over the long term than gold itself, the Nasdaq, and GDX, the markets leading gold stock ETF: franco-nevada.com/about-us/Overview/default.aspx
These royalty stocks trade at drastically higher multiples than golder miners themselves and currently the three biggest precious metal royalty companies, Franco Nevada, Wheaton, and Royal Gold trade at price to sales ratios of 28, 18, and 14 respectively: Finviz.com
Enter Carbon Streaming Corporation. This company is going to employ the Franco Nevada royalty model to Carbon Credits. The company just raised over $100 million USD in a financing bringing the total cash in their treasury to $141 million USD with no debt. With about 200 million shares outstanding undiluted this amounts to about $0.70 per share in cash. The stock currently trades at about $1.40 per share meaning that when you “net out” the cash, the market is giving Carbon Steaming an Enterprise Value of $140 million. In my opinion this is cheap given the size of the opportunity, the quality of management, and the first mover advantage the company will enjoy for the next 6-12 months.
The CEO of Carbon Streaming is Mr. Justin Cochrane, former investment banker and executive vice president of Sandstorm Gold (NYSE: SAND) , a very successful gold royalty company that has grown from a tiny micro cap to a large player in the space that may one day be considered amongst the giants like Franco Nevada. He has personally been involved with hundreds of millions of dollars of royalty transactions in the precious metals space. He put up millions of dollars of his own money in this latest financing round which is critically important when considering investing in smaller companies in my opinion. The management team as a whole bought 10 million worth of the latest financing.
The shareholder roster for the company is also very impressive and includes legendary Canadian resource entrepreneurs/investors Marin Katusa and Ross Beatty. Mr. Katusa recently took down almost 10% of the over $100 million dollar financing and is considered by many to be the “Young Warren Buffett” of resource investing up here in Canada. He tends to be very reserved and conservative in his valuation models and very selective about his stock picks and entry prices. He is the company’s largest shareholder. In his words: “The amount of capital that has and will continue to be deployed into the Carbonomics Sector is mind boggling—it’s in the hundreds of billions and will reach the trillions….Carbon Streaming Corp is the first company to get involved in the financing and production of carbon credits at a large scale. The company is priced attractively for speculators, given the
early-stage venture risk….I do believe that by 2030, the carbon market can be larger than copper and gold markets, and by 2040 could be $2 trillion larger than the oil market. Let that sink in for a moment. The opportunity here is so compelling and we have a chance to get a core position in one of the leaders in this industry before it gets listed on a Big League exchange.”
The company currently owns two Carbon Credit Streams, the Marvivo Blue Carbon Project and the Bonobo Peace Forest Project. Management has stated both of these projects have Internal Rates of Return (IRR) greater than 15% which is unheard of at this point in the precious metals sector given all of the new companies and competitors have entered the space over the last 10 years. I will not go into the details here but Blue Carbon Credits are superior to regular Carbon credits and will trade at a substantial premium in terms of price. Basically blue carbon credits are created by the growth and conservation of carbon-absorbing plants, such as mangrove forests and their associated marine habitat. A blue carbon project will have its carbon credits trade at a premium because of the enormous second-order benefits on such things as, for example, corals, algae, and marine biodiversity that have been so deleteriously affected by over-fishing and farming.
I expect management to start to deploy their war chest of cash immediately to build their portfolio of high quality carbon credit streams to position itself as the Franco Nevada of the Carbon Credit space. These deals should be positive catalysts for the stock moving forward. Management has stated they are aiming to exit 2023 at a revenue run rate of $200 million USD per year. And that is only using CURRENT PRICING for carbon credits, which actually are expected to move much higher in price over the next few years. Putting a 10-20x pierce to sales multiple on that would peg CSC with a market cap in the billions in a little over 2 years. But with all the “hot money” capital that will seek to enter this space over the next two years I would not be surprised if the market cap gets much higher than that. The reason for this is simple. Other than the exchange traded fund KRBN there are still very few ways for investors to get “pure play” exposure to carbon credits. CSC is going to be the first publicly listed company that provides investors with a way to invest in an equity 100% focused on carbon credits. Given the massive amount of capital looking to get in on this emerging hot investment trend and the tiny amount of options available to those investors, there will likely be massive buying pressure on the stock. Think of a fire hose worth of water trying to get pushed through the eye of a needle!
Conclusion
The carbon credit market is starting to take off and is poised for massive growth over the next 5, 10 and 20 years. CSC has perfectly positioned itself to take advantage of this trend by employing the proven and golden business model (pun intended) of royalty and streaming financing to this fast emerging intangible commodity space. We have a chance to get in on the ground floor of a company that could easily be worth many billions of dollars at a tiny market cap before it lists on a major exchange. The company has all the cash and management expertise that it needs to execute its business model and create enormous wealth for early shareholders. Good luck and good investing to all!
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